&l;p&g;&l;img class=&q;dam-image getty size-large wp-image-543643852&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/543643852/960×0.jpg?fit=scale&q; data-height=&q;664&q; data-width=&q;960&q;&g; The first of Britain&s;s new supersonic stealth strike fighters arrives in the UK for the first time at RAF Fairford on June 29, 2016 in Gloucestershire, England. The F-35B Lightning II jet was flown by RAF pilot Squadron Leader Hugh Nichols on its first transatlantic crossing, accompanied by two United States Marine Corps F-35B aircraft from their training base at Beaufort, South Carolina. The combined US/UK team of aircrew and engineers are here in the UK to demonstrate just what the 5th generation state of the art aircraft can do, flying at the Royal International Air Tattoo and Farnborough International Air Show over the next few weeks. The aircraft are due to enter service with the Royal Navy and RAF in 2018. (Photo by Matt Cardy/Getty Images)
In late March the current administration approved and signed a bill that increases U.S. defense spending by $80 billion to a record $700 billion, which makes for an intriguing investment opportunity into equities like Lockheed Martin&a;rsquo;s (LMT-US) and recently recommended Boeing (BA-US). CressCap currently lists BA and LMT as some of the top U.S. equities. The foundation of our recommendations is to identify companies that perform best and worst on the collective basis of value, growth, EPS revisions, profitability, and LT momentum. The CressCap systematic trading model gathers data daily on 6,500 companies globally and assigns academic grades (A – F) for each financial metric. These grades are scored relative to its region/sector. Lockheed and Boeing&a;rsquo;s standing as one of the leading aerospace and defense producers internationally is reflective of LMT and BA&a;rsquo;s impressive financials and future deals with governments around the world.
&l;img class=&q;wp-image-159 size-large&q; src=&q;http://blogs-images.forbes.com/richardtrefzwilliams/files/2018/04/BALMT2-1200×418.jpg?width=960&q; alt=&q;&q; data-height=&q;418&q; data-width=&q;1200&q;&g; CressCap currently lists BA and LMT as some of the top U.S. equities. The foundation of our recommendations is to identify companies that perform best and worst on the collective basis of value, growth, EPS revisions, profitability, and LT momentum.
&l;em&g;Boeing (BA-US) &a;nbsp;Overall Grade: A+&l;/em&g;
Boeing has been a driving force behind innovation in aerospace engineering, defense and technology for over 100 years. CressCap has highlighted the company, again, due to its top rank and strong fundamentals amongst U.S. equities we screen. Boeing is a leading player in the development of next gen technologies for both military (drones, fighters, bombers, etc.) and civilian (Dreamliner, 777, 737, etc.) markets globally.
Regarding Boeing&a;rsquo;s aerospace and defense segment (BDS), the company&a;rsquo;s &l;a href=&q;https://www.sec.gov/Archives/edgar/data/12927/000001292718000007/a201712dec3110k.htm&q; target=&q;_blank&q;&g;annual report states&l;/a&g;, &a;ldquo;BDS&s; primary customer is the United States Department of Defense (U.S. DoD). Revenues from the U.S. DoD, including foreign military sales through the U.S. government, accounted for approximately 79% of its 2017 revenues. Other significant BDS customers include the National Aeronautics and Space Administration (NASA) and customers in international defense, civil and commercial satellite markets.&a;rdquo;
CressCap&a;rsquo;s grades for Boeing&a;rsquo;s fundamentals are favorable, with high marks in value, profitability and momentum. Boeing&a;rsquo;s CF/ROI grade is an A+ at a rate of 130.1% compared to the sector avg. 15.56% The company reported solid ROE, graded A+ by CressCap, at 1397.9% vs. the sector avg. 6.35%. From 2016 to 2017, the company&a;rsquo;s EPS grew by 20.54%, a net income growth of 67.44% and operating margins, in the same time period, grew by 81.28%.
The ongoing &l;a href=&q;https://seekingalpha.com/article/4163018-boeing-extends-lead-airbus-mega-orders&q; target=&q;_blank&q;&g;battle for mega-deals&l;/a&g; between Boeing and Airbus (AIR-FR) turned in favor of Boeing during March. Over the course of the month BA agreed to 197 orders compared to Airbus&a;rsquo; 8 logged orders. The significant difference in the amount of orders demonstrates consumer preference to Boeing aircraft, which could benefit the stock in the short term.
The stock has produced a remarkable run with confirming momentum so the current correction is fairly mild and suggests higher highs before this bull formation is complete.
&l;em&g;Lockheed Martin (LMT-US) &a;nbsp;Overall Grade: B&l;/em&g;
Lockheed Martin is a manufacturer of components and systems for aerospace and defense. The company&a;rsquo;s market share spans across the globe and includes the F-35, which could be significant profit driver for decades to come. LMT&a;rsquo;s principal customers are agencies of the U.S. Government, with 70.5% of revenue coming from the United States, and 29.5% of revenue generated internationally. CressCap&a;rsquo;s five factor analysis has highlighted the company&a;rsquo;s profitability, value, and EPS revision metrics as the leading factors of the buy recommendation. LMT&a;rsquo;s solid fundamentals, future goverment projects such as the F-35 planes, and the current administration&s;s announcements of corporate tax breaks paired with increased defense spending budgets set LMT&a;rsquo;s stock with a positive outlook that could present investors with lucrative returns.
CressCap grades Lockheed Martin&a;rsquo;s 2017 CF/ROI (cash flow over return on investment) an A+ at a reported rate of 45.2% vs. the sector avg. 15.5%. This metric measures a company&a;rsquo;s profitability, management&a;rsquo;s efficiency and performance against sector peers. In the same time frame, CressCap grades Lockheed&a;rsquo;s ROE an A+ at a rate of 465.9% compared to aerospace and defense industry competitors, such as Raytheon (RTN), with ROE of 20.1%, and General Dynamics (GD) with ROE of 26.8%.
The company&a;rsquo;s 2017 ROI was also reported at 13.5%, graded A-, vs. the sector avg. of 4.9%. 2017 revenues were $51.1 billion, up 8%, operating cash flow was $6.5 billion, up 24.8% and operating margins 12.9%, up 10.7% yoy. Additionally in FY17, Lockheed Martin&a;rsquo;s free cash flow grew by 28.4% and grades FCF/share an A at 2.7x against the sector average 1.0x. Lockheed dividends grew by 10.2%, to $7.46 from $6.77 yoy. CressCap&a;rsquo;s grade for Lockheed&a;rsquo;s EPS revisions is a C+ signaling that the revisions have not advanced as much as other stocks in the IT sector, though revisions have improved over 90 days by 15%, from $15.59 to $17.93.
Regarding the impact of the new tax law, the company states in its &l;a href=&q;https://www.sec.gov/Archives/edgar/data/936468/000093646818000013/lmtq4201710ka.htm&q; target=&q;_blank&q;&g;2017 annual report&l;/a&g;, &a;ldquo;we wrote down our net deferred tax assets as of December 31, 2017 by $1.9 billion to reflect the estimated impact of the Tax Act. We recorded a corresponding net one-time charge of $1.9 billion ($6.69 per share).&a;rdquo; Along with the benefits LMT will experience from tax reform, the House of Representatives&a;rsquo; Committee on Appropriations produced a &l;a href=&q;https://appropriations.house.gov/news/documentsingle.aspx?DocumentID=395176&q; target=&q;_blank&q;&g;March press release&l;/a&g; stating increases in defense spending amounting to $80 billion.
Since the beginning of April, Lockheed has announced several updates regarding current and future projects. Two of those projects include the company&a;rsquo;s deal with the Pentagon for F-35 jets as well as a partnership with NASA to develop a &l;a href=&q;https://news.lockheedmartin.com/2018-04-03-NASA-Selects-Lockheed-Martin-Skunk-Works-R-to-Build-X-Plane?_ga=2.39390435.1707096565.1523902605-482690050.1523902605&q; target=&q;_blank&q;&g;supersonic X-Plane&l;/a&g; set to be ready by 2021. LMT&a;rsquo;s &l;a href=&q;https://news.lockheedmartin.com/2018-04-12-F-35-Completes-Most-Comprehensive-Flight-Test-Program-in-Aviation-History?_ga=2.127148109.1707096565.1523902605-482690050.1523902605&q; target=&q;_blank&q;&g;April 12th press release&l;/a&g; on the F-35 project, states, &a;ldquo;Developmental flight test is a key component of the F-35 program&s;s SDD phase, which will formally be completed following an Operational Test and Evaluation and a Department of Defense decision to go into full-rate aircraft production.&a;rdquo; These projects show the company&a;rsquo;s potential future profitability and stability.
International political uncertainty surrounding the Syrian conflict and other hot spots may lead to accelerated military spending as has often been the case in the past. We believe this could generate positive stock performance for defense and aerospace companies&a;rsquo; stocks like LMT and BA. Both of the company&a;rsquo;s fundamentals, as highlighted by CressCap&a;rsquo;s analysis, suggest the potential for longer term gains for investors.
Technically, the recent correction may have helped to bring valuations lower, while the tax package and increases in defense spending plans may have accelerated cash flow and earnings growth for LMT. The LT trend support remains intact, suggesting further upside potential relative to peers and market averages.
See our previous recommendation on Boeing &l;a href=&q;https://www.forbes.com/sites/richardtrefzwilliams/2018/02/12/boeing-is-flying-above-cloud-9/&q;&g;here&l;/a&g;.
&l;em&g;&l;strong&g;Written by:&a;nbsp;&l;a href=&q;mailto:firstname.lastname@example.org&q; target=&q;_blank&q;&g;Richard Williams email@example.com&l;/a&g; and&a;nbsp;&l;a href=&q;mailto:firstname.lastname@example.org&q; target=&q;_blank&q;&g;David Cress email@example.com&l;/a&g;&l;/strong&g;&l;/em&g;
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