3 Defense Stocks in Focus on Syrian Tension

This article was originally published by Zacks.com.

International pressure is gradually mounting for a military strike on Syria in the wake of a chemical weapons attack in a Damascus suburb. If this happens, it would bring a much needed boost to the domestic defense and aerospace industry, which was under the constant threat of sequestration and budget cuts.

The Obama administration claims that the Syrian government fired rockets loaded with nerve gas on opposition-controlled parts of the Damascus suburbs on Aug. 21, 2013. That attack reportedly killed 1,429 people, including 426 children. Against this act of terror the Obama administration is trying to marshal domestic support for a U.S. led air strike against the Bashar al-Assad regime.

The U.S. aerospace and defense stocks have lately been hit by fears of automatic budget cuts resulting from sequestration. Now that President Obama is increasingly gaining support for a military strike against Syria from both Republican and Democratic leaders, heady days may finally be back for defense stocks again. This is particularly true if ground troops are ruled out while Pentagon beefs up firearms for the proposed military air strike.

Three players to make most of Syria

Given a choice of three defense stocks that are likely to benefit from this situation, we would suggest the following names: Raytheon Company (RTN), Lockheed Martin Corp. (LMT) and Northrop Grumman Corp. (NOC).

Waltham, Mass.-based Raytheon’s Tomahawk cruise missile is said to be President Barack Obama’s weapon of choice. Tomahawk has become an important weapon in the U.S. defense arsenal for its precise capability to take out high value target from a very long distance. These missiles have a range of 1,000 nautical miles (1,150 statute miles) and can be launched both from surface and submarines. The latest version, Block IV, has a satellite link that enables it to hover over the battlefield as it awaits target instructions.

Meanwhile, the U.S. Department of Defense has also increased its orders on Tomahawk that could prove to be a windfall for Raytheon. The company registered a boost in net Tomahawk sales of $32 million during the second quarter 2013 on a year-over-year basis. Hence, Raytheon is expected to bolster its bottom line from the latest potential conflict. This has also pushed the company’s stock price to a new 52-week high of $77.93 on Aug. 26, 2013.

Given the Syrian army’s 4th Armored Division, the U.S. could use fighter planes such as Lockheed Martin’s Joint Air-to-Surface Standoff Missile, and the Joint Standoff Weapon made by Raytheon, besides the use of cruise missiles. While both have shorter ranges than the Tomahawks, the advantage lies in the fact that these could be launched from outside Syrian airspace.

Among other possible weapons, Northrop Grumman’s B-2 bomber might also be used. Designed and manufactured by Northrop Grumman along with the assistance of yet another defense major The Boeing Co. (BA), this bomber is also known as the Stealth Bomber. B-2 is the flagship of the nation's long range strike arsenal and one of the world's most survivable aircraft. Northrop Grumman is the Air Force's prime contractor for the B-2. It can fly unrefueled for more than 6,000 nautical miles and over 10,000 nautical miles with just one aerial refueling. It has already proven its capabilities in many combat circumstances whether in the recent Operation Iraqi Freedom or during Operation Odyssey Dawn in Libya.

Shares of Raytheon, Lockheed Martin and Northrop Grumman are trading at an attractive 13.4x, 13.1x and 12.0x the estimate for 2013, and their share prices have gained approximately 31.6%, 37.6% and 40.4%, respectively, so far this year.

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