Al Root

President Donald Trump's trillion-dollar request for defense in his fiscal 2026 budget request tells investors something: Trump's peace through strength positioning isn't bad for the industry.

But the proposed spending levels might not lead to a bump for the stocks just yet.

The president on Friday released his fiscal 2026 " skinny," or initial, budget request. Included was a 13% boost in defense spending to $1.01 trillion.

That level of growth is good for defense stocks, and it probably hasn't been priced in yet. "At about a 15% discount to industrials, we estimate current defense valuations are about in line with periods of zero budget growth," wrote Wells Fargo analyst Matthew Akers in a report Friday.

Lockheed Martin, Northrop Grumman, L3Harris Technologies, General Dynamics, and Huntington Ingalls Industries trade for an average of about 18 times estimated 2025 earnings, according to FactSet. The S&P 500 trades for almost 22 times.

Growth of 13% -- when investors essentially expect nothing -- is a positive. That isn't a green light to buy the shares of defense prime contractors, though. "We think investor sentiment remains mixed on upcoming program review results and skepticism that budget can continue growing from here," added Akers.

There is "still a long road ahead," wrote Capital Alpha Partners analyst Byron Callan in a report, noting it was only the initial request. "Clearly, there are moving parts to DoD spending, including the results of internal program reviews," added Callan. "We are reluctant to call out winners and losers at this point, particularly for large U.S. primes."

Callan covers the industry but doesn't have ratings and price targets on the stocks. Akers, for his part, favors Northrop and L3Harris, rating both stocks at Buy. His price target for Northrop is $525 a share. His price target for L3Harris is $248.

Overall, 57% of analysts covering Northrop stock rate shares Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average analyst price target for Northrop stock is about $537 a share.

Almost 75% of analysts rate L3Harris shares Buy. The average analyst price target is about $257.

Akers rates Lockheed and General Dynamics shares at Hold. Those two are less popular than Northrop and L3Harris. Overall, 42% of analysts covering Lockheed stock rate shares Buy, and 43% rate General Dynamics shares Buy.

Akers doesn't cover Huntington Ingalls. Overall, 31% of analysts covering the stock rate shares Buy.

Coming into Monday, shares of the five defense contractors have risen about 7% this year, about 10 percentage points better than the S&P 500. Huntington has led the way, up about 22%, recovering from some recent lows. Lockheed shares were the weakest, down about 3%.

Write to Al Root at allen.root@dowjones.com

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May 05, 2025 06:12 ET (10:12 GMT)

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