Barclays: Defense Sector Stock Prices Enter Risky Territory

With the profits of big industrial companies increasingly at risk from currency headwinds, U.S. defense sector shares are likely to grind higher, Barclays analyst Carter Copeland said Thursday. The exchange-traded fund iShares Dow Jones US Aerospace & Def.ETF ITA is up nearly 8 percent since November, versus less than 2 percent for the Dow Jones Industrial Index. "We wouldn't recommend fighting the momentum" in the defense sector as "alternatives appear scarce," Copeland said. But Copeland maintains a Neutral rating on the sector, warning that the stocks are entering increasingly risky territory with prices precariously supported by available cash flow and earnings. As a result, "upside could get more limited" later in 2015, Copeland said. Copeland nonetheless raised his target nearly 11 percent to $152 on Northrop Grumman Corporation NOC and also boosted price objectives on General Dynamics Corporation GD by nearly 3 percent to $148 and on Lockheed Martin Corporation LMT 1.5 percent to $193. The analyst maintained Equal Weight ratings on all three companies. Although a recent 5 percent increase in requested defense spending from the White House stirred market talk of a "turn of the cycle," Copeland is skeptical that any spending uptick will be robust. Defense spending "is unlikely to outgrow the broader economy over the next decade," Copeland said. It's not a bold prediction, given that spending on the sector has lagged growth in the Gross Domestic Product since at least 1965, Copeland said.