Why are defense stocks falling? Goldman downgrades Lockheed, Northrop, Raytheon

bbevren/iStock via Getty Images

Some of the biggest names in the defense industry fell on Friday after analysts at Goldman Sachs downgraded their shares.

Lockheed Martin (NYSE:LMT), the largest US defense contractor, was cut to Sell from a Neutral investment rating on its limited ability to buy back shares. Lockheed ( LMT ) fell 3.7% to hit a three-month low.

“While Lockheed ( LMT ) has committed to large near-term share repurchases, much of that may have already happened, and we see limited capital deployment on top of that, with downside risk to free cash flow if Lockheed ( LMT ) at any time to revise its interpretation of the research and development cash tax to align with that of the rest of the industry,” according to Goldman.

Goldman cut its price target for Lockheed ( LMT ) to $322 per share from $388 per share.

Raytheon (NYSE:RTX) was downgraded to Neutral from Conviction Buy due to less exposure to the booming commercial aircraft market. The stock fell as much as 3.1% to hit a three-week low.

“Raytheon is relatively positioned in the defense end market; but it has seen the latest pace of industry spending and supply chain challenges, which could continue into 2023 and put 2025 targets at risk in the segments,” according to Goldman.

Goldman cut its price target for Raytheon ( RTX ) to $105 a share from $115 a share.

Northrop Grumman (NYSE:NOC) was downgraded to Sell from Neutral on the current rating and the possibility of pressures on the US defense budget. Northrop ( NOC ) fell as much as 6.8% to hit a five-month low.

“Northrop (NOC) is trading at the high end of its long-term historical valuation range relative to the S&P500 (SP500), which historically tends to be associated with the early stages of defense budget increases and/or an overall accelerating defense,” according to Goldman. “Northrop (NOC) is also the most expensive hedge premium we cover, trading at a relative price greater than the historical average for the group.”

Growth rates may be harder to sustain as major defense programs mature after the U.S. military awarded them to Northrop ( NOC ).

“While Northrop (NOC) has won two large, early-stage defense programs that could allow it to go over budget over the next several years,” Goldman said, referring to the B-21 stealth bomber and the Sentinel missile system , “the company will face any budget pressures if they increase.”

Goldman lowered its price target for Northrop ( NOC ) to $375 a share from $440 a share.