Citi Analyst Predicts Significant Growth in Defense Sector

Citi analyst Jason Gursky forecasts growth in the defense sector, driven by increasing US and European defense budgets. He recommends investing in Leidos Holdings, Lockheed Martin, and SAIC, with potential upside of 12%, 12%, and 15%, respectively.

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Nitish Verma
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Citi Analyst Predicts Significant Growth in Defense Sector

Citi Analyst Predicts Significant Growth in Defense Sector

Citi analyst Jason Gursky forecasts substantial growth in the defense sector, driven by increasing defense budgets in the US and Europe. Gursky recommends investing in three defense companies: Leidos Holdings, Lockheed Martin, and Science Applications International Corp (SAIC), with potential upside of 12%, 12%, and 15%, respectively.

Why this matters: The growth of the defense sector has significant implications for global security and international relations, as it can influence the balance of power and shape the trajectory of conflicts. As defense spending increases, it is essential to consider the potential consequences for human rights and global stability.

Lockheed Martin, one of Gursky's top picks, recently received a $332 million contract to manufacture the Guided Multiple Launch Rocket System (GMLRS) for the Army. The GMLRS is a GPS-guided rocket designed to hit targets up to 70km away, with an extended-range variant capable of reaching 150km. The Army plans to spend approximately $1.2 billion to $1.4 billion on the GMLRS between fiscal years 2025-2029. The weapon system has also been included in US military aid packages for Ukraine since February 2022.

Leidos Holdings, another of Gursky's recommended buys, is a defense and intelligence firm that offers large-scale systems, command and control, data analytics, and logistics to organizations like the DoD, NASA, and US allies abroad. Shares of Leidos have risen 36% so far in 2024 and 16% in the last month. The company has a consensus rating of "Moderate Buy" and is expected to grow earnings by 2.56% in the coming year.

SAIC, the third company highlighted by Gursky, is a technical, engineering, and enterprise IT services provider, primarily serving the US government. The company offers IT modernization, digital engineering, artificial intelligence, weapon systems support, and other services. SAIC has a consensus rating of "Reduce" but is expected to grow earnings by 11.10% in the coming year. In the past three months, SAIC insiders have bought $478.08 million in company stock and sold $95.49 million, indicating positive sentiment.

The defense industry has faced some scrutiny regarding the human rights impact of their products. A recent shareholder resolution at RTX proposing a report on this issue received only 5.41% of votes at the company's annual meeting. A similar proposal at Lockheed Martin also failed. Many investors in the defense sector claim to adhere to international human rights frameworks, but continue to invest in companies whose products have been used in conflicts like Israel's campaign in Gaza.

Despite these concerns, Gursky's analysis suggests that increasing global defense spending will drive significant growth for major US defense contractors in the coming years. With geopolitical tensions on the rise, the outlook for the defense industry appears bullish from a financial perspective. Leidos, Lockheed Martin, and SAIC are well-positioned to benefit from this trend according to Citi's assessment.

Key Takeaways

  • Citi analyst Jason Gursky forecasts 12%-15% growth in defense sector.
  • Recommended stocks: Leidos Holdings, Lockheed Martin, and Science Applications International Corp (SAIC).
  • Increasing defense budgets in US and Europe drive sector growth.
  • Defense industry faces scrutiny over human rights impact of products.
  • Geopolitical tensions drive bullish outlook for defense industry.