Which Defense Contractors?
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Which Defense Contractors?
I want to add a few Defense Contractors to my VP to "tilt" towards that in my overall portfolio (since they are obviously included in TSM and SP500).
Which does the board recommend? Honeywell seems to be a mixed play since they also do consumer products as does GE so I want to avoid both. Looking for pure plays ideally. No Boeings for example.
Which does the board recommend? Honeywell seems to be a mixed play since they also do consumer products as does GE so I want to avoid both. Looking for pure plays ideally. No Boeings for example.
- MachineGhost
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Re: Which Defense Contractors?
You want to look at Northrup Grumman, Lockheed Martin and General Dynamics.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: Which Defense Contractors?
Those 3 and Raytheon are already on my radarMachineGhost wrote: You want to look at Northrup Grumman, Lockheed Martin and General Dynamics.

Any others?
- MachineGhost
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Re: Which Defense Contractors?
http://washingtontechnology.com/toplist ... /2012.aspxTripleB wrote: Any others?
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: Which Defense Contractors?
Rockwell Collins (COL) has a big private sector component to its business (which may not be what you are going for on a macro level) but they are very profitable. All of the other big defense names have ROIs around 10% whereas Rockwell has a ROI of 16%. ROI is my go to metric for a firm because ROI>WACC=Economic profits for shareholders. If you have a low ROI you better hope your firm has a low WACC.
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Re: Which Defense Contractors?
Lockheed Martin always seemed to have the most influence in the aviation area and beyond, from what I saw.
Re: Which Defense Contractors?
This isn't a question/comment about COL, but just stocks in general.melveyr wrote: Rockwell Collins (COL) has a big private sector component to its business (which may not be what you are going for on a macro level) but they are very profitable. All of the other big defense names have ROIs around 10% whereas Rockwell has a ROI of 16%. ROI is my go to metric for a firm because ROI>WACC=Economic profits for shareholders. If you have a low ROI you better hope your firm has a low WACC.
If the ROI is larger, than isn't it already priced into the stock?
Also, won't the WACC for a larger SP500 company always be lower than for a mid/small/micro-cap company? In theory the bigger company can borrow more cheaply because it's bigger and more established so banks/investors view it as having less risk.
- dualstow
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Re: Which Defense Contractors?
I've done well with Lockheed/LMT, although I didn't do a heavy analysis before I bought it. I wanted some aerospace, and I bought it when the share price had taken a beating.
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Re: Which Defense Contractors?
In an efficient market everything would already be priced in, which would making picking them pointlessTripleB wrote:This isn't a question/comment about COL, but just stocks in general.melveyr wrote: Rockwell Collins (COL) has a big private sector component to its business (which may not be what you are going for on a macro level) but they are very profitable. All of the other big defense names have ROIs around 10% whereas Rockwell has a ROI of 16%. ROI is my go to metric for a firm because ROI>WACC=Economic profits for shareholders. If you have a low ROI you better hope your firm has a low WACC.
If the ROI is larger, than isn't it already priced into the stock?
Also, won't the WACC for a larger SP500 company always be lower than for a mid/small/micro-cap company? In theory the bigger company can borrow more cheaply because it's bigger and more established so banks/investors view it as having less risk.

I agree that larger companies are going to have a lower WACC than smaller companies all else equal.
everything comes from somewhere and everything goes somewhere
Re: Which Defense Contractors?
How do you find their WACC? Is it explicitly listed in the 10K or do you have to estimate it based on an algorithm (like weighted average of existing long term debt interest rates)?melveyr wrote: I agree that larger companies are going to have a lower WACC than smaller companies all else equal.
Re: Which Defense Contractors?
You are going to have to calculate it on your own. It is a pretty long and annoying process. I haven't done it myself, but I will get back to you if I end up doing it at some point. My school has access to a Bloomberg terminal and you can look it up there. I think the hardest part is coming up with the cost of equity because it is never explicitly stated; the cost of equity is the opportunity cost for the investors.TripleB wrote:How do you find their WACC? Is it explicitly listed in the 10K or do you have to estimate it based on an algorithm (like weighted average of existing long term debt interest rates)?melveyr wrote: I agree that larger companies are going to have a lower WACC than smaller companies all else equal.
everything comes from somewhere and everything goes somewhere
- Ad Orientem
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Re: Which Defense Contractors?
Although both Obama and Romney are creatures of the military industrial complex and supporters of perpetual war as a foreign policy, I would be a bit cautious about banking on military spending remaining the financial waterfall it has been for the last fifty years.
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Re: Which Defense Contractors?
TripleB,
Another interesting way to judge a companies history of value creation is to look at the market value of equity vs. the book value of equity.
Market Value Added = Market Value of Equity - Book Value of Equity
This is a cumulative measure, but it is interesting to see which companies have been good stewards of capital (AAPL, XOM) and which ones haven't (BAC, C). They only trade at a premium to book value of equity if they have generated economic profits over time (ROIC>WACC).
Another interesting way to judge a companies history of value creation is to look at the market value of equity vs. the book value of equity.
Market Value Added = Market Value of Equity - Book Value of Equity
This is a cumulative measure, but it is interesting to see which companies have been good stewards of capital (AAPL, XOM) and which ones haven't (BAC, C). They only trade at a premium to book value of equity if they have generated economic profits over time (ROIC>WACC).
Last edited by melveyr on Sun Oct 21, 2012 3:33 pm, edited 1 time in total.
everything comes from somewhere and everything goes somewhere
- MachineGhost
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Re: Which Defense Contractors?
Since you have access to a Bloomberg terminal, I'd like you to run a backtest using your strategy and post the results here.melveyr wrote: You are going to have to calculate it on your own. It is a pretty long and annoying process. I haven't done it myself, but I will get back to you if I end up doing it at some point. My school has access to a Bloomberg terminal and you can look it up there. I think the hardest part is coming up with the cost of equity because it is never explicitly stated; the cost of equity is the opportunity cost for the investors.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: Which Defense Contractors?
Haha, I don't have a strategy! I don't have a VPMachineGhost wrote:Since you have access to a Bloomberg terminal, I'd like you to run a backtest using your strategy and post the results here.melveyr wrote: You are going to have to calculate it on your own. It is a pretty long and annoying process. I haven't done it myself, but I will get back to you if I end up doing it at some point. My school has access to a Bloomberg terminal and you can look it up there. I think the hardest part is coming up with the cost of equity because it is never explicitly stated; the cost of equity is the opportunity cost for the investors.

everything comes from somewhere and everything goes somewhere