More Federal Spending To Bolster Profits
According to an analysis by FactSet, it's not a surprise that defense stocks have risen in anticipation of more federal spending because these companies get the vast majority of their revenues from the government.
The report says that, "the U.S. government is the largest source of revenue for 19 of the top 22 U.S. defense companies by market value. Of these companies, 10 derive more than 50% of their revenue from the U.S. government."
If Trump's proposal for more defense spending passes in some form, that will likely translate into chunkier profits for these companies. However, despite this bullish outlook, not all analysts are convinced that now is the time to jump on the defense stock bandwagon. Citi Research is cautious on the group largely because of valuations.
"After nearly seven years with a positive bent on defense stocks, we are now turning more neutral on the group," said analysts at the firm. "This shift is driven by a potential disconnect in investor expectations for industry growth and by potential pressure on historic business models. We don't think the sector underperforms indices going forward per se; it's just that it's reaching fair value."
Contact Sumit Roy at [email protected].