Deutsche Bank made various adjustments to its ratings on several major defense stocks in separate notes Friday, reflecting changes in the companies' outlooks and recent performance.
Northrop Grumman (NYSE:NOC) has been upgraded to a Buy from Hold, with the target price significantly raised to $575 from $474. Deutsche Bank analysts noted that "clarity offered on yesterday's earnings call with respect to future B-21 profit trends eliminates an overhang," which previously justified a more conservative valuation.
Northrop Grumman's assurance of profitable production for B-21 units 22-40 due to price, productivity, and economic price adjustment (EPA) clause protection was a key factor in this upgrade, according to the bank. This clarity is said to have alleviated fears that these units might be produced at a loss, which would have negatively impacted the company's long-term growth trajectory.
Lockheed Martin (NYSE:LMT) also received an upgrade to Buy" from Hold, with a new target price of $600, up from $540. This upgrade is driven by strong second-quarter results, which point to a "beat/raise opportunity in 2H24" and potential upside to 2026 EBIT. The analysts believe this could lead to the stock rerating to reflect these opportunities, supporting a 5.0% target FCF yield on 2026.
Conversely, L3Harris Technologies (NYSE:LHX) has been downgraded to Hold from Buy despite a slight increase in the target price. The downgrade is attributed to a 16% year-to-date run in shares, limited upside from current levels, and relatively modest beat/raise on 2Q adjusted EPS. The analysts expressed concerns about the lack of significant organic growth acceleration and the dependence on margin improvements for further upside.
Finally, General Dynamics (NYSE:GD) was also downgraded from Buy to Hold, with an unchanged target price of $320. The analysts noted a preference for more substantial market-beating returns for Buy-rated stocks and highlighted risks in Aerospace EBIT due to the substantial number of future deliveries required by the current sell-side consensus.
While the firm believes GD remains an attractive long-term investment, the analysts prefer to shift their bias elsewhere until there is better confidence in potential estimate upsides or multiple rerating.