00:00:05 Speaker A
The defense sector, starting to report earnings, Lockheed Martin and Northrup Grumman, both announcing Q2 results on Tuesday. Those stocks moving in opposite directions. We’re now going to have a play the defense sector this earning season with the Yahoo Finance Playbook. And joining me now is Richard Safran, senior analyst of Aerospace and Defense at Seaport Research Partners. Richard, it’s good to see you. So, we got a few different defense names to talk about reporting and moving today. But let let’s start with a a notable mover, Richard. That would be Lockheed Martin, which is under some real pressure. We’re down more than 10% in today’s trade. What do you make of their reported results, Richard?
00:01:07 Richard Safran
Um, well, it was quite obviously, as you noted from the stock reaction, very disappointing results. Um, you know, you had a miss, um, all around versus expectations. The issue is is that they, uh, the street doesn’t like surprises and you had a bigger than expected charge on one of their classified programs, aeronautics. And you had totally unexpected charges on some of their or losses on some of their helicopter programs. Nobody expected this. Um, um, and and so, um, quite obviously street doesn’t like surprises as I said, and the stock reaction, um, I think reflects that. I think, you know, um, what you’d have to consider here is you have a tale of two companies today. Uh, you mentioned Lockheed, we also had Northrup reporting today. Um, wouldn’t be surprised if you Northrup had a very good day. And I wouldn’t be surprised if part of the stock reaction was uh, people rotating out of a Lockheed and into Northrup Grumman, for example.
00:03:05 Speaker A
And Richard, as they rotate out of Lockheed Martin here, I I know you tell your clients this one’s still a buy. Why is it a buy, Richard? What are the catalysts ahead?
00:03:26 Richard Safran
So, I think that the primary reason that that this stock and defense in general remains a buy, um, is number one, I think today’s reaction just tactically, I think today’s reaction was a bit of an overreaction. I mean, if you take a look at things and you subtract out the charges, um, Lockheed actually would have beat expectations. But the primary reason, I think, um, you know, defense and Lockheed remain a buy is you’re looking at double digit growth in addressable defense spending. So this would be investment spending, um, in fiscal 26. And I think this is only the start of a long-term double digit growth trend, uh, in in defense spending. I think that this new administration is putting a high priority on modernization, um, at the expense of some other discretionary spending items. I think Lockheed, Northrup, and other defense companies are going to benefit as a result.
00:05:11 Speaker A
Let let’s talk about some other names too. I want to talk about one that’s on deck in terms of General Dynamics. What do you expect to hear there, Richard?
00:05:32 Richard Safran
I think you’re going to have a pretty good day. Uh, I think primarily, um, you know, if I take a look at government spending in a month, um, the biggest spending item was on army spending. Uh, I think that that could benefit their combat segment. But perhaps more importantly, um, I think that they’re going to beat, um, in their aerospace or business jet segment, these Gulfstream business jets that they make, uh, General Dynamics is one of the premier manufacturers of high-end business jets. Uh, and I have them, for example, beating expectations by 10 cents tomorrow. Uh, I also think that they could take up their guide, um, as a result of some better performance. Second quarter is typically when they is when they do the updates. So, bottom line, I think we’re going to have a good day with General Dynamics tomorrow.
00:07:19 Speaker A
So that all sounds very positive, Richard, but correct me if I’m wrong, my friend, you have a a neutral on this name. So, so why the lukewarm rating?
00:07:46 Richard Safran
Oh, well, you know, General Dynamics did suffer some quite a few execution issues and delays with its business jet. So yeah, things are definitely on the mend there tomorrow. Um, but the other thing too is, I think, you know, to a large degree, um, you know, it was expected that things would would eventually improve there. But my neutral rating was basically, you know, it it’s been on for for quite some period of time, uh, but basically having to do with their business jet segment and the execution there.
00:08:45 Speaker A
Another name I want your take on while I have you, Boeing. I believe you’re a believer on that one, Richard. You have a buy?
00:09:05 Richard Safran
Absolutely. In fact, it’s it’s um, one of my highest conviction buys. Uh, how to explain that one to us.
00:09:49 Speaker A
How to explain that one to us.
00:09:51 Richard Safran
I think it’s, you know, one of the things you have to look at is is um, where it is, you know, right now, um, I think Boeing is benefiting from vastly improved execution, and I think that’s largely due to their um, new CEO, Callie Ortberg, uh, who I’ve known quite some period of time. So I think number one, you’re you’re looking at a story that where you’ve had some pretty bad execution and a number of issues on their 737 Max and 787. I think that’s clearly moving in the right direction, and I expect to hear more good news on their conference call. But the primary reason I think to buy Boeing right now is that I think that we’re just the start of a um, of a of an order cycle that’s an extended order cycle that’s going to last quite some period of time. I think that’s being driven by both pent up demand because we haven’t had, um, uh, we had supply chain issues and executions at Boeing that I think have held back deliveries. And also because I think we’re going to have replacement demand. Um, I think, you know, a lot of as airplanes get older, uh, they tend to be replaced. So I think all that’s going to drive a rather long and extended aerospace cycle, uh, that I don’t think is being priced in right now.
00:12:06 Speaker A
Richard, you know, there’s a broader um, theme in this industry. I want your take on because we’ve had defense analysts come on, Richard, and some of them have said, listen, the the modern battlefield is changing. And their point is, Richard, yes, fighter jets in the future will still be important and and battleships and tanks, but increasingly, they argue, so will autonomous systems and and robots, and AI will play an increasing role. Are the primes that you cover, Richard? Are they are they well positioned to take advantage of this pivot?
00:13:29 Richard Safran
If you know brilliant question, and I get asked this, you know, quite a bit. And the answer is yes, but it depends on on on certain products. You know, you have to remember, right? Um, large aerospace and defense firms like Lockheed and Northrop are very good and superb at very low volume, very high value-added content manufacturing. That’s what makes them good at making fighter jets and certain autonomous systems. But as you get into, you know, much smaller systems, you know, handheld weapons and things like certain things where you’re much more dependent on volume and less value-added content, that’s going to be suited to to other manufacturers. So, I think absolutely, you know, um, defense companies are very good. They’re teaming um, where they need to, uh, in order to bring on capabilities that they might be missing. But I think as long as, you know, aerospace and defense companies, at least the large cap ones that I cover, right, stick with low volume, very high value-added content manufacturing. Yes, I think I think the answer to your question is absolutely yes.
00:15:30 Speaker A
Richard, great to have you on the show today, sir. Thank you so much.
00:15:37 Richard Safran
You’re very welcome. It’s been a pleasure. Take care.