Northrop Grumman, iRobot, AeroVironment: Three Defense Stocks To Watch

Includes: AVAV, NOC
by: Dmitriy V

Unmanned with the defense budget under tight scrutiny, it is hard to justify investing in defense stocks. Realistically, both political parties will attempt to cut discretionary spending in an effort to curb the ballooned deficit, and defense will be the easiest target. Having said that, there are compelling reasons to explore an emerging sector within the defense community that in the long run will save the government millions of dollars.

Consider this: Finding new soldiers to fight an unpopular war is not only difficult, but it's costly. The U.S. Army offers an enlistment bonus of $20,000 for new recruits. Furthermore, over 28,000 American troops have been wounded in the Iraq and Afghanistan campaigns. The health care costs for returning soldiers are only really going to be felt in a few years.

In response, the military is starting to ramp up procurement of unmanned military vehicles that will soon start replacing our soldiers and pilots. There are a number of companies that will start generating impressive revenues from sales of new technology that will save American lives and dollars. Here are two examples:

  • The U.S. Navy has awarded Northrop Grumman Corporation (NYSE:NOC) a six year, $635.8 million contract to conduct exercises with a fixed-wing unmanned air system [UAS], known as the X-47B. The X-47B air vehicles are being assembled in Palmdale , Calif. , by a world-class industrial team that includes Lockheed Martin (NYSE:LMT), Pratt & Whitney, GKN Aerospace, GE Aviation, Honeywell (NYSE:HON), Eaton Aerospace (NYSE:ETN), Moog Inc. (MOGA), Wind River (WIND) , Goodrich(GDP), Parker Aerospace, Dell (NASDAQ:DELL), Hamilton Sundstrand, and Rockwell Collins (NYSE:COL).
  • The Army has deployed three Special Weapons Observation Remote reconnaissance Direct action System [SWORDS] onto the Iraq battlefield. This is a huge step for next generation robotic warriors entering the battlefield. iRobot (NASDAQ:IRBT) has a lot to gain from this. The new mobile robot PackBot is designed to conduct Explosive Ordnance Disposal [EOD], HAZMAT handling, search-and-surveillance, hostage rescue and other vital law enforcement tasks for bomb squads, SWAT teams, and military units. iRobot is also coming out with a more sophisticated robot next year designed to pack heat. The future of robots in the battlefield will appear in the September 2007 issue of National Defense Magazine.
  • The Air Force recently announced that it had taken delivery of its initial BATMAV micro unmanned aircraft systems [UAS], from AeroVironment Inc. (NASDAQ:AVAV). The military has at least 30 orders for systems over the next five years.
  • On August 10th, President Bush announced a tighter crackdown on illegal immigrants in lieu of the unsuccessful immigration bill. Together with war time operations, border security will drive demand for technology that can take surveillance to a new level. It is fair to assume that sales for these systems will increase rapidly.

    Total revenue for AeroVironment Inc, has increased 77% between April 2006 and April 2007. AVAV looks pretty cheap compared with some of its peers in the industry at current price levels; at 10% above 52 week low, 16 P/E, there is ample room for growth.

    NOC / IRBT / AVAV 1-year chart