The Defense Sector

[Dividend Watcher]

(07-22-2014, 10:37 AM)DividendGarden Wrote: I feel you. I bought NOC in 2012 in the high $50's, but I only bought one share! My plan was to monitor it over time and add to it. I added again in late 2013 in the $90's.
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Now, at $126/share, I'm not sure I want to add to it here, but my position is so small. It's my only holding in the defense sector, but I like LMT and GD for long-term holding.

I have to preface this with I didn't do any significant research on any of these companies at this time (other than monitoring RTN which I hold).

DividendGarden, you are only looking at price. To repeat an often quoted phrase, "Price is what you pay, value is what you get." I was just thinking about this sector when this thread appeared and some thoughts kept rolling around in the empty space between my ears. So I created a portfolio on Yahoo just to look at some of the stats and included BA, BAESY, GD, HON, LLL, LMT, NOC, RTN, TXT and UTX. Probably should have included GE and HRS also but got lazy.

On a P/E basis, RTN, NOC and LLL all appear to be about or a little under value with P/Es less than 15; NOC being the lowest at 13.7.

Using PEG, all but BAESY, GD & LLL are not too high (under 2.0) when looking at what you're paying for growth. In a down market, I prefer a PEG less than 1.4 but in the market we have today, you have to pay up both for quality and growth.

Yield is pretty low for all of them but LMT is the standout winner at 3.2%. The rest are at 2.5% or less. Of course, if you look at payout ratio, I believe LMT's was pretty high last I looked.

If you look at P/S, HON is the worst at 1.88 but I don't consider that grossly out of line. I prefer less than 1.75 and the rest are between 1.0 and 1.5. This may reflect that there is some uncertainty about government spending on defense.

So, I guess you need to look deeper than just the price. Don't let anchoring or recency bias affect your decisions when constructing your portfolio. I was just thinking the other day that if RTN wasn't such a large part of my portfolio (#7 out of 27), I'd probably add on this latest dip. I had trimmed it earlier in the year to add some more diversity in the portfolio. It was #3 I believe.

Perhaps it would bolster your confidence to research what part NOC is playing in the defense field. Is it making parts for the F-35? Does it make a lot of disposable weaponry like RTN's missiles and decoys that have to be replaced? How much of it's contract money comes from new systems and maintenance/upgrades?

Don't take all these stats at face value. PEG especially since it relies on estimates and we know how reliable they can be. Yahoo is known to make mistakes also (gasp), just like any of the other financial websites.

Disclosure: I hold RTN in my portfolio, LMT in my mother-in-laws portfolio and would like put GD or LMT in my wife's portfolio when the cash is available and the yield is a little higher.

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(07-22-2014, 11:56 AM)Roadmap2Retire Wrote: Ive gone off on a tangent there...but like I said earlier, I want to do some more research on what kind of technological innovation advantage one company might might have over others. Looking for reading material

R2R, here's an article on RTN I thought very interesting and shows how one company creates a recurring revenue stream even if new weapons orders are not forthcoming.

Raytheon Builds a Fleet of Decoy Robots

We have a LMT plant around here and the place is bristling with spinning test radar arrays and antennae.

GD is (or was back when I was in the service) renowned for designing and building the best submarines in the world. I wouldn't doubt they still are. Newport News Shipbuilding & Drydocking couldn't hold a candle to GD's design for maintenance & usability -- saw it first hand.

I ramble on ... here's some reading material for you.