Morgan Stanley issued a strong endorsement for defense stocks in a note Friday, highlighting their potential resilience in the current market environment, especially as geopolitical tensions remain elevated.
Following a robust second quarter of 2024, where defense companies delivered "across-the-board 'beat and raises,'" Morgan Stanley has adjusted its ratings on several key defense firms.
The firm upgraded General Dynamics (NYSE:GD) to Overweight from Equal-weight, citing the company's "premier balance sheet" and strong prospects for capital return.
Morgan Stanley highlighted the strong demand for GD's defense products, including ammunition and ground vehicles, as well as a promising lineup of new Gulfstream aircraft, which collectively present "strong earnings growth potential."
On the other hand, Morgan Stanley downgraded L3Harris Technologies (NYSE:LHX) to Equal-weight from Overweight. The analysts pointed out that other companies in the sector offer more upside potential from supply chain improvements.
Additionally, L3Harris' elevated leverage following the Aerojet deal is said to limit its near-term capital return potential compared to peers.
Morgan Stanley also reiterated its Overweight rating on Northrop Grumman (NYSE:NOC), emphasizing the removal of key overhangs, such as concerns around B-21 bomber profitability.
The firm noted that Northrop's resilient portfolio and attractive free cash flow growth profile make it a strong investment.
Despite the positive outlook for the sector, Morgan Stanley remains cautious on Lockheed Martin (NYSE:LMT), maintaining an Equal-weight rating.
While the company has shown topline acceleration, the investment bank says ongoing pressures such as pension obligations and uncertainty around F-35 payment terms keep the firm on the sidelines.
Overall, Morgan Stanley sees defense stocks as a solid investment, particularly in the current uncertain market climate, and has adjusted its ratings to reflect this outlook.