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Lockheed Martin (NYSE:LMT) -1.8% and L3Harris (NYSE:LHX) -2% declined on Wednesday after analysts at Wells Fargo downgraded the defense contractors.
Lockheed was cut to Underweight from Equal Weight, while its price target was raised to $415 from $406 a share. L3Harris was downgraded to Equal Weight from Overweight with a price target lowered to $238 from $272 a share.
The bank foresees a difficult year ahead with U.S. budgetary constraints and the possibility that global political tensions will ease.
"The bull case for defense seems clear — geopolitical tensions are high and politicians have discussed higher defense spending," Matthew Akers, analyst at Wells Fargo, said in the Sept. 28 report. "On the other hand, we think 2023 sets up as a difficult U.S. budget environment, with significant downside potential if tensions ease."
Investors may think that defense stocks act as a hedge against stock-market declines, but their record is mixed in the past 20 years, the bank's research indicates. Consumer staples and utilities stocks are less likely to underperform during market corrections, or declines of at least 10% from a peak.
Wells Fargo reiterated its Overweight rating on General Dynamics (GD), while lowering its price target to $249 from $256. The bank also maintained its Equal Weight on Northrop Grumman (NOC), while raising its target to $516 from $455 a share.
Seeking Alpha contributor Dhierin Bechai rates Lockheed (LMT) as a Buy on higher defense spending in Europe. Columnist Leo Nelissen has a Buy rating on L3Harris (LHX) on the potential of higher dividends.
| Wells Fargo EPS estimate changes, Sept. 28 | |||
| 2023E | |||
| New | Old | ||
| General Dynamics (GD) | $14.19 | No change | |
| L3Harris Technologies (LHX) | $13.49 | $13.71 | |
| Lockheed Martin (LMT) | $27.74 | No change | |
| Northrop Grumman (NOC) | $24.67 | $26.87 | |