Defense Stocks Update

Brit Ryle

Posted October 25, 2023

Back on July 17, we talked about defense stocks. I told you: 

I check in on defense stocks every once in a while, cuz I keep thinking at some point, the macro environment will look favorable for them and they will start moving…

They never do.

Sorry to disappoint, but I think there’s better places for your money than defense stocks. Still, I’ll be watching to see if Congress gets a little more serious about our defense needs

I looked at three defense stocks in that article – Raytheon (NYSE: RTX), Lockheed-Martin (NYSE: LMT) and General Dynamics (NYSE: GD).

Raytheon was $96 the day that article was published. Today it’s $78 – and that’s after it jumped $5 yesterday after a solid earnings report. 

Lockheed-Martin was $469 on July 17 – and I pretty much top-ticked the stock. It’s up $8 to $448 after yesterday’s earnings. 

Now, about General Dynamics, I wrote: If I had to pick one, it would be General Dynamics. Revenue growth is expected to be less than 10% like the others – $41.5 billion this year to $44.3 billion next year. But at least GD has some real earnings growth – $12.64 a share this year and $14.78 next year.

General Dynamics pays a 2.45% dividend and a low payout ratio of 30%. Throw the potential for a dividend hike in with the forward P/E of 17, and I could see maybe a 25% move for the stock over the next year, but that’s about it.

GD was $216 at the time. Today it’s up $10 to $243. So it’s up 12%  since July 17, about half the 25% gain I thought it might put on overt a full year. 

Not a bad call. 

*****The drumbeat of “slowing EV demand” is getting louder. You may have seen a headline or two saying that “GM Abandons EV Production Target.”

Sounds worse than it is. 

On its earnings conference call last night, GM (NYSE: GM) CFO Paul Jaconsson said: 

I also want to highlight a few items Mary [Barra, GM CEO] on our retimed EV volume and product production decisions. These actions will impact our previous EV production targets, including the 100,000 EV target we had for the second-half of 2023, and cumulative 400,000 EVs from 2022 to the first-half of 2024. We are not providing new targets, but are moving to a more agile approach to continually evaluate EV demand and adjust production schedules to maximize profitability.

EV sales were never going to move in a straight line. Even though we’ve seen ~50% growth in sales so far this year, I can’t say I’m surprised, or particularly worried, that GM doesn’t feel it can meet its goal of making (and I assume selling) 400,000 EVs by the end of 2024. 

The EV market is still a new market. Do we really think automakers should be able to perfectly manage every aspect of it from the get-go?  

I’m far more concerned about GMs driverless car division Cruise, and automated technology in general. GM dumped $700 million into Cruise last quarter, and California just banned Cruise vehicles because they’re dangerous. 

Tesla’s third quarter deliveries were down – after it set a record for Q2. I’m OK with that, too. Though with a couple caveats. The first is that as more EVs come to market, it doesn’t feel like a surprise that Tesla should be losing some market share, and that’s what’s happened. Tesla’s share has fallen from 62% at the start of the year to ~50% in the last quarter. 

And caveat #2 concerns Tesla founder Elon Musk himself. The guy is not making any friends with his behavior. I can’t tell you exactly how representative my own kids are, but they wouldn’t buy a Tesla if it were the last car on earth. 

One more thing about Tesla. Net profit margin was down to 11% from around 15% last year. That’s still about double the margins that Ford and GM achieve.  

*****I noted the other day that Ford was cutting a shift at its F-150 Lightning EV factory. That’s another pretty obvious indicator of a demand issue. But again, I have questions. I moved from Baltimore to a small town on the southern coast of Georgia a year ago. One big difference you notice right off is the number of pickup trucks on the road. They are ubiquitous…

Now, the F-150 is an iconic vehicle, best-selling truck in the world for like 20 years running. I can’t help but wonder if maybe Ford didn’t misunderstand its customers’ loyalty to the F-150? Just because the EV version says “F-150” on it doesn’t mean it’s the same truck. 

Would it really be a surprise to learn the F-150 drivers don’t want to switch to the EV version? 

And along that same line of thought, would it be a surprise that someone that wants an EV truck would want a Rivian instead of a Ford?

*****Fisker (NYSE: FSR) just said it would cut the price of its headline Ocean Extreme SUV by 11%, down to $61. But it’s also raising the price for its other two SUVs, the Ocean Ultra and Ocean Sport by 6% and 4% to $52,999 and $38,999. 

I don’t know what that means for Fisker. 

*****Funny that all the headlines today are focusing on Google’s (NASDAQ: GOOG) rather than Microsoft’s (NASDAQ: MSFT) beat. Especially the part where Microsoft said it was raising its  CAPEX spending estimate to $44 billion over the next year. 

In any event, the negative waves have a NASDAQ and especially chip stocks getting massacred today. And the S&P 500 is right back to the support zone at 4,175 that we looked at on Monday. Fail here and 4,050 is in play. 

That’s what I got for you today, take care and I’ll talk to you on Friday,

Briton Ryle
Chief Investment Strategist
Pro Trader Today