Jubak's Journal
Recent articles:
• 12 global growth stars you've never heard of, 2/8/2005
• 5 stocks for an up-and-down year, 2/4/2005
• Just how nervous are Alan Greenspan & Co.?, 2/1/2005
More...
| | Jubak's Journal
5 ways to play the Bush budget
A lot of talk about the proposed federal budget centers on cuts. But defense and homeland security spending would rise, giving stocks in those sectors a boost.
By Jim Jubak
The budget for fiscal 2006 that President Bush sent to Congress this week has cuts for just about everything. There are cuts for farm subsidies, education, community economic development, environmental protection and programs to put more cops on the streets.
That's just about everything in the discretionary budget, the part that doesn't include the stuff that has to be paid, such as interest on the national debt, Social Security, Medicare and Medicaid. Just about but not quite. The budget for defense and homeland security is set to rise in fiscal 2006 if Congress follows the president's budget recommendations.
Defense spending would rise 5% from fiscal 2005, and that's not counting any "supplementary" spending for the wars in Afghanistan and Iraq. Homeland security, excluding defense, would get a 3% boost.
So if you've been pouring over the details of the Bush administration spending plan looking for companies, and stocks, that come out as winners, look no further. Defense and homeland security are where the budget action is this year.
Defense stocks are especially attractive now. For one thing, defense contractors will be the recipients of what little largesse there is flowing from Washington this year. For another, companies like like L-3 Communications Holdings (LLL, news, msgs) and Lockheed Martin (LMT, news, msgs) fell 10% to 15% from their December highs to their January lows thanks to talk of cuts in high-profile weapons programs for the Navy and Air Force. The stocks have started to bounced back now that the budget is out and congressional representatives are saying high tech weapons programs based in their districts will be cut over their dead bodies. In the year ahead, defense stocks are likely to be one of the few havens in times of market volatility. And that's likely to keep the stocks moving higher.
The list
Here are the three budget winners that I recommended during my Wednesday appearance on CNBC's "Morning Call" at 11:15 a.m. ET.
Mine Safety Appliances (MSA, news, msgs). If it's used to protect the safety of workers or soldiers from hazardous environmental conditions, Mine Safety Appliances makes it. The company's instruments measure the dangers in hazardous environments. Its respiratory protective gear purifies the air breathed by rescue workers or soldiers. Its thermal imaging cameras let rescue crews see through smoke and darkness. The company also makes a line of consumer products.
The Wall Street consensus puts earnings per share growth at 49% for 2004 and 17% for 2005. With homeland security and defense spending set to increase in 2005, the estimates seem low. The stock sells for 25.6 times projected 2004 earnings and 21.8 times projected 2005 earnings. Our StockScouter rated the stock a 6 out of a possible 10 on Feb. 9.
L-3 Communications makes the high-tech components for the communications gear required by the modern battlefield. For example, the company's high transmission rate, jam-resistant communications components and systems are in use on battlefields in Iraq and Afghanistan. The Navy's Aegis-class destroyers use L-3 Communications voice and data switching systems.
Organic revenue growth should be about 15% this year and earnings growth is projected to top that at 19%. But the company could do even better than that. L-3 Communications has pursued an aggressive acquisition strategy aimed at building up leading positions in significant niche markets in the defense and homeland security sectors. L-3 Communications has built up a $4.4 billion backlog of funded orders. The stock trades at 22 times 2004 earnings per share and 18.5 times projected 2005 earnings. It has officially ended its January retreat by crossing above its 50-day moving average. Our StockScouter rated the stock a 9 on Feb. 9.
Lockheed Martin should show record earnings in 2005 as orders continue to flow its way in its defense and satellite businesses and as the company improves its profits margins as the need for pension contributions declines. Cash flow should pop this year, too, as the company continues its sale of investments in Intelsat and other satellite ventures. It'll also repurchase stock. And don't forget that the U.S. government isn't Lockheed Martin's only defense customer. Foreign orders for the F-35 fighter, cash up front, are on track to turn that program into a $200 billion business.
The stock trades at 20.5 times 2004 earnings and at 17.6 projected 2005 earnings. Our StockScouter rated the stock a 6 on Feb. 9.
Exclusive picks
And as always, I have two more exclusive picks for CNBC.com on MSN readers.
Armor Holdings (AH, news, msgs). I know, I know. I keep recommending this stock . No apologies. This company is the best way to play the refitting of the Army caused by the war in Iraq and changes in the Army's equipment as it prepares to fight a generation of wars like this.
Armor orders just keep flooding in from the Defense Department. On Jan. 5, it was an order for $54 million in armor for heavy trucks. That followed a Dec. 12 order for additional armor on the army's Humvee fleet. And that's on top of the $750 million in armor orders from the military and $250 million from other costumers that Standard & Poor's had counted by the end of September.
The only question, now that monthly demand for small arms protective inserts, as the armor is called, have climbed to 25,000 sets a month from 1,600 sets in 2002, is whether Armor Holdings will be able to get its hands on enough ballistic fiber to meet demand. With suppliers set to bring new facilities on line, that doesn't seem likely to be a problem. But that worry, and analysts' projections that earnings growth will drop to 15% in 2005 from 160% in 2004, is probably what's keeping this stock relatively cheap. It trades at just 17.8 times projected 2005 earnings. Our StockScouter rated the stock a 7 on Feb. 9.
World Fuel Services (INT, news, msgs) is an off-the-beaten track play on the defense budget. The company markets marine and aviation fuel and services to a customer base of international shipping and aviation companies and U.S. and foreign militaries. In the third quarter, earnings per share grew by 19%. The company, the largest independent marketer of marine and aviation fuel, continues to make acquisitions as it aims for scale in a very, very fragmented industry. The latest deal was the 2004 acquisition of Tramp Holdings, a marine fuel marketer. Our StockScouter rated the stock a 4 on Feb. 9.
Editor's Note: A new Jubak's Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak didn't own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
|
