Avoid These 2 Defense Stocks Recently Downgraded by Goldman Sachs

The global aerospace and defense industry witnessed a decline in revenues last year. Between 2019 and 2020, the total industry revenues dropped 2.8% to $874 billion, with the supply chain feeling a far greater burden at a loss of more than 3%. Although the industry is expected to recover in 2021, the commercial aerospace sector is expected to remain crippled by lower passenger traffic.

Although the defense sector is expected to recover faster than the commercial segment, it should take a while for the industry to return to its pre-pandemic highs. Given the uncertainties and challenges surrounding the industry, prominent defense stocks Lockheed Martin Corporation (LMT) and Mercury Systems, Inc. (MRCY) are best avoided now because of their weak fundamentals.

These stocks have been recently downgraded by Goldman Sachs (GS) from Buy to Neutral.

Lockheed Martin Corporation (LMT)

LMT is a security and aerospace company engaged in the research, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide. It operates through four segments: Aeronautics; Missiles and Fire Control; Rotary and Mission Systems; and Space.

Earlier, the F-35 Joint Program Office (JPO) and LMT agreed on an F-35 production rebaseline that ensures predictability and stability in the production process. This agreement requires LMT to deliver 133-139 aircraft this year, 151-153 aircraft in 2022, and anticipates delivering 156 aircraft beginning in 2023 and for the foreseeable future. The expected returns from this deal are spread over an extended period.

LMT’s net sales increased 5% year-over-year to $17.03 billion in the fiscal second quarter that ended June 27. However, its gross profit declined 2.8% from the year-ago value to $2.15 billion. The company has experienced performance issues on a classified program at its Aeronautics business segment. This led to its aeronautics segment’s operating profit declining 23% year-over-year to $572 million. Also, its total business segment operating profit declined marginally year-over-year to $1.77 billion.

Analysts expect LMT’s revenues to increase 3.9% year-over-year to $17.14 billion in the current quarter ending September 2021. However, the consensus EPS estimate of $1.91 for the ongoing quarter indicates a 69.4% decline from the same period last year. Shares of LMT have declined 8.6% over the past year, and 2.4% over the past month to close yesterday’s trading session at $352.15.

LMT’s bleak growth prospects are reflected in its POWR Ratings. The stock has a D grade for Growth in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree. Among the 66 stocks in the Air/Defense Services industry, LMT is ranked #20.

Get LMT ratings for Value, Quality, Sentiment, Stability, and Momentum here.

Mercury Systems, Inc. (MRCY)

MRCY is a technology company engaged in manufacturing and selling components, products, modules, and subsystems for aerospace and defense industries in the United States, Europe, and the Asia Pacific.

On September 27, MRCY announced that it had signed a definitive agreement to acquire Avalex Technologies Corporation, a provider of mission-critical avionics. The transaction is expected to close during MRCY’s fiscal 2022 second quarter ending December 31, 2021. So, it might take a while for the company to capitalize on Avalex’s technological expertise.

For the fiscal fourth quarter that ended July 2, MRCY’s net revenues increased 15.4% year-over-year to $250.84 million. However, its income from operations came in at $22.41 million, reflecting a decline of 15.2% from the same period last year. Its net income decreased 34.2% from the year-ago value to $17.93 million. The company’s EPS declined 34.7% year-over-year to $0.32.

The consensus revenue estimate of $214.46 million for the fiscal first quarter (ending September 2021) indicates a 7.4% increase year-over-year. However, the Street expects the company’s EPS to decline 21.6% from the prior-year quarter to $0.40 in the current quarter. MRCY has slumped 39.4% over the past year to close yesterday’s trading session at $47.66. The stock has declined 45.9% year-to-date.

MRCY has a grade of D for Sentiment in our proprietary ratings system. It is ranked #44 in the same industry.

Click here to view additional grades for MRCY, including Growth, Value, Momentum, Quality, and Stability.

LMT shares were trading at $351.12 per share on Wednesday afternoon, down $1.03 (-0.29%). Year-to-date, LMT has gained 1.07%, versus a 17.54% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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