2 Major Defense Corporations Will Reap Rewards of Global Growth
Tuesday, 19 October 2010
Over the weekend, I had a conversation with a close friend of mine who is just starting his investment portfolio and we chatted quite a bit about China and India. He still thinks the growth prospects of these two countries remain strong, but he didn’t know how to invest in foreign companies.
When many investors think about global and emerging markets, they think the only way to play the growth is by investing directly in foreign countries.
But the truth is, you don’t have to go outside the U.S. to take advantage of the growth potential around the world…
The China-India Defense Contractor Connection
China and India are among the most booming global markets in the world. Specifically, sectors like infrastructure, travel and the military are strong in both countries.
A byproduct of China’s economic growth will be increased military, aviation and infrastructure spending on equipment, aircraft, traffic controls systems and of course weapons and weapons systems from defense contractors; we are already seeing this.
So Who Benefits?
Lockheed Martin (LMT:NYSE), Boeing (BA:NYSE), the U.S. government and other companies like United Technologies and Raytheon all sell (or have sold) equipment to China (and Taiwan, which has been a source of contention). The focus for me is on Boeing and Lockheed.
Recently, President Obama lifted the ban on Lockheed C-130 aircraft sales to China as a gesture of good faith. The government seems to be working toward improving our relationship with China and this can only benefit companies like Lockheed Martin and Boeing. In 2010, Boeing sold a relatively large amount of commercial aircraft in China.
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The Bigger Story
Aside from China demand helping drive sales for both companies, there is a large potential aircraft and equipment deal in the works with India. There is a deal pending with India to buy 10 Boeing C-17 transport aircraft, which would be the country’s largest military transaction yet with the U.S., according to The Wall Street Journal. Though negotiations are still ongoing, the total value of the initial deal could top $10 billion to $12 billion, primarily for combat aircraft. The aircraft sale would also include other equipment from General Electric.
This is just the tip of the potential earnings iceberg that could be headed for Boeing or Lockheed. Both aviation companies plan to bid for $31 billion worth of military contracts in India over the next 10 years. This is due to a tripling of the nation’s defense budget.
According to Siddharth Philip of Bloomberg, the Indian government intends to spend $33 billion (U.S. dollars) on defense in the fiscal year starting April 1, 2011. Both BA and LMT have made their first defense-related sales to India over the past 2 1/2 years.
Bilateral trade with the U.S. has risen to over $37.6 billion annually.
It’s not the simplest thing for an American company to work its way into India and/or China. In this case, I believe that BA and LMT both have a unique angle and both have a good existing stable business model and valuation aside from any deal, which would be icing on the cake, not to mention it can’t hurt to have the President of the United States as somewhat of a spokesman and salesman for that matter.
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Boeing vs. Lockheed Martin
Boeing’s stock has been on a tear for the past couple of weeks, and has been strong or at least stable over the past year and a half; it’s currently trading at a P/E multiple of almost 54 times earnings, which seems a bit high to me.
Lockheed, which is actually a larger company, but with half the market cap, is trading at 9 times earnings and has mostly been on the decline since its $87 high in May of this year. It reports earnings today and I think it would be the better deal of the two at $70 per share and a dividend yield of 3.6%. LMT would be my first choice.
With both of these stocks, I think there is room for upside from here, although I would be more cautious with BA, as there are high expectations for its earnings, which are due out tomorrow. Earnings for BA may lead to a short-term sell-off, which may give you an opportunity to buy!
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Other Related Topics: China Investments , Defense Contractors , Emerging Markets , Foreign Investments , Global Markets , India Investments , Jared Levy , Smart Investing Daily
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