What are we looking for?
U.S. aerospace and defence companies trading at attractive valuations as the country approaches its first-ever trillion-dollar defence budget.
The screen
As the conflict in the Middle East continues, the U.S. defence budget is approaching a historic milestone. President Donald Trump has proposed a fiscal 2026 defence budget of more than US$1-trillion, a 13.4-per-cent increase over the prior year. New funding is intended to support shipbuilding, advanced munitions, advanced aircraft, and missile defence initiatives. The trend extends beyond U.S. borders, as NATO allies committed at last year’s summit to raising defence spending targets from 2 per cent to 5 per cent of GDP by 2035, expanding the market for U.S. defence contractors internationally.
Using FactSet’s screening tool, I identified U.S. aerospace and defence companies well-positioned to capture this spending growth by applying the following criteria:
- included in the S&P 500 index
- market capitalization greater than US$10-billion
- classified in the aerospace and defence sector, according to FactSet
- forecast one-year sales growth greater than 5 per cent
The nine remaining companies were ranked by a multifactor ranking of five metrics: price to earnings, price to sales, price to free-cash flow, one-year forecast sales growth, and enterprise value to EBITDA.
What we found
Lockheed Martin Corp. LMT-N, an aerospace and defence company, ranked first with a price-to-earnings ratio of 21.9 times, well below the group average of 45.5 times. The company reported full-year 2025 sales of US$75-billion, up 6 per cent year-over-year, and generated US$6.9-billion in free cash flow. Its year-end backlog reached a record US$194-billion, representing approximately 2.5 times annual sales and providing multiyear revenue certainty. The company is accelerating production capacity for the F-35 fighter jet and PAC-3 missile defence systems, both central to U.S. and allied deterrence strategies. Additionally, income investors will be pleased to know that Lockheed has raised its dividend for 23 consecutive years.
Honeywell International Inc. HON-Q, a diversified industrial and aerospace technology company, ranked second with a price-to-earnings ratio of 22.2 times and forecast one-year sales growth of 5.7 per cent. Orders grew 23 per cent in its most recent quarter, led by strong demand for its aerospace technologies and energy and sustainability solutions, pushing the company’s backlog to a record US$37-billion. Honeywell is pushing forward plans to spin off its aerospace division as an independent publicly traded company in the third quarter of 2026, a move expected to create one of the world’s largest pure-play aerospace and defence entities.
The information in this article is not investment advice. The author assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.
Arjun Deiva, CFA, is an MBA Candidate at the University of California, Berkeley, Haas School of Business.