China’s Naval Expansion: Why Defense Stocks Like NOC & LMT Are Poised for Growth

August 28, 2024

In the first half of 2024, China’s shipbuilding industry secured nearly 75% of new global orders, demonstrating the nation’s expanding manufacturing power. Ship completions surged by 18.4% year-over-year to 25.02 million deadweight tons (dwt), which represents 55% of the global total during this period. Moreover, the industry’s order backlogs increased by 38.6% to 171.55 million dwt. China’s dominance is no fluke, the country leads in 14 out of 18 major ship types for new orders.

But what’s driving this rapid ascent? It’s a mix of cutting-edge technology, surging global demand, and the unmatched efficiency of Chinese shipyards. By adopting advanced construction techniques and digital tools, China has managed to build ships faster and better, which has translated into booming profits. In fact, the industry’s profits for the first five months of 2024 came in at 16 billion yuan ($2.24 billion), up 187.5% year-over-year.

China’s defense industry is rapidly advancing, producing increasingly larger and more capable warships at an impressive pace. For instance, the construction of the Yulan-class landing helicopter assault (LHA) ship, also known as the Type 076, at the Changxing Island Shipbuilding Base. This vessel is set to be a game-changer, poised to become the largest amphibious assault ship in the world.

Satellite images from July 4 show the vessel’s flight deck spans over 13,500 square meters, which is nearly the size of three American football fields. That’s significantly larger than the U.S. America-class LHAs and Japan’s Izumo-class carriers and much bigger than its Chinese predecessor, the Type 075.

The Type 076 isn’t just about size; it’s about capability. With room for dozens of aircraft, drones, and amphibious landing craft, plus accommodations for over 1,000 marines, this ship is set to revolutionize the People’s Liberation Army’s (PLA) power projection. Its expansive flight deck and roomy internal hangar will offer enhanced capacity and flexibility, making it a formidable addition to China’s naval arsenal.

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Images also reveal that the drydock where the new 076 class is being constructed opened only in October as part of a new port expansion. This rapid production is giving Beijing a significant edge, with the potential to outpace its rivals like the United States.

Since 2019, China has launched four Type 075 vessels, with two now combat-ready and four more on order. Although the U.S. Navy leads in total warship tonnage, China has surpassed the U.S. in the number of warships over 1,000 tons, and in combat logistics and support vessels.

The real worry for U.S. officials is China’s shipbuilding capacity. According to U.S. Naval Intelligence, China’s shipbuilding capacity is now 632 times greater than the U.S., supported by a vast network of efficient shipyards.

In the past decade, China has launched 23 destroyers and eight guided-missile cruisers, while the U.S. has launched only 11 destroyers and none of the cruisers. This booming production capability, backed by a robust civilian shipbuilding industry, is raising serious concerns in Washington.

As nations respond to China’s expanding naval prowess, there is likely to be increased demand for advanced defense technologies and military solutions. This heightened demand could drive growth in defense stocks, reflecting the broader trends in global military strategy and procurement.

Therefore, investors and defense analysts are turning their attention to how companies like Lockheed Martin Corporation (LMT) and Northrop Grumman Corporation (NOC) are positioned to capitalize on these developments. With that in mind, let’s dig deeper into the fundamental strength of the featured stocks in detail.

Lockheed Martin Corporation (LMT)

Security and aerospace company LMT focuses on research, design, development, manufacture, integration, and sustainment of advanced technology systems, products, and services. It operates through four segments: Aeronautics; Missiles and Fire Control; Rotary and Mission Systems; and Space.

LMT’s net sales increased 8.6% year-over-year to $18.12 billion in the fiscal 2024 second quarter (ended June 30). Its consolidated operating profit grew marginally from the year-ago value to $2.04 billion, while its non-GAAP net earnings amounted to $1.64 billion in the same period. Also, the company’s EPS came in at $6.65, up 3.3% year-over-year.

While analysts predict a slight 4.6% drop in EPS for the year ending December 2024, its revenue is expected to grow by 5.5% year-over-year to $71.25 billion. For fiscal 2025, forecasts suggest revenue and EPS will hit $74.16 billion and $28.01, respectively.

Regarding rewarding shareholders, Lockheed Martin offers a stable dividend with a four-year average yield of 2.66% and a payout ratio of 44.3%. LMT’s current annual dividend of $12.60 translates to a 2.26% yield at the prevailing share price. Moreover, the company has increased its dividend payouts at a CAGR of 6.9% over the past three years.

In terms of price performance, the stock has gained nearly 30% over the past six months. As defense budgets rise globally, driven by geopolitical tensions, Lockheed Martin is well-positioned to benefit and deliver stable returns to your portfolio.

Northrop Grumman Corporation (NOC)

NOC operates as a global aerospace and defense technology company through four segments: Aeronautics Systems; Defense Systems; Mission Systems; and Space Systems. The company leads in satellite manufacturing and space technology, contributing to missions like NASA’s Artemis program.

Recently, the company declared a quarterly dividend of $2.06 per share on the common stock, in consistent with its 10% increase announced on May 14. This dividend is payable to its shareholders on September 18, 2024. With a forward annual dividend of $8.24 per share and a yield of 1.62%, Northrop not only rewards shareholders but also boasts 21 years of consecutive dividend growth.

Financially, NOC is on a solid footing. In the second quarter (ended June 30, 2024), its total sales increased 6.7% year-over-year to $10.22 billion, while its total operating income rose 12.7% from the year-ago value to $1.09 billion. Net earnings for the quarter came in at $940 million and $6.36 per share, reflecting an increase of 15.8% and 19.1% from the same period last year, respectively. Also, its free cash flow improved by 79.7% from the prior-year quarter to $1.10 billion.

Street expects NOC’s revenue to increase 5.2% year-over-year in the current year (ending December 2024) to $41.34 billion, while its EPS is expected to grow by 8.2% from the prior year to $25.20 in the same period. For the fiscal year 2025, its revenue and EPS are expected to reach $42.92 billion and $27.69, registering an increase of 3.8% and 9.8%, respectively.

Moreover, NOC’s shares have gained more than 16% over the past month and nearly 9% year-to-date, making it a compelling option in a rapidly evolving defense landscape.

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Source: China’s Naval Expansion: Why Defense Stocks Like NOC & LMT Are Poised for Growth