L3Harris Technologies estimates have troughed, Lockheed Martin thesis played out

Wells Fargo upgraded shares of L3Harris Technologies (NYSE:) and Lockheed Martin (NYSE:) to Overweight from Equal Weight in a note on Monday.

Analysts raised the LHX price target to $209 from $204 per share and assigned LMT a $440 per share price target.

The analysts said the risk/reward in the aerospace and defense sectors has improved, while government shutdown fears “could provide an attractive entry point near-term.”

“Defense margins have fallen off ~100 bps since their 2021 peak, roughly the magnitude of the drop in EAC adjustments over the same period. We think EACs could start to move higher from here, continuing the Q2 sequential trend, although we expect gradual improvement rather than a step change. Among our coverage, LHX has the most upside if EACs return to normal,” the analysts wrote.

For LHX, the firm believes estimates have troughed, while they see catalysts to realize value. “We think LHX’s portfolio lends itself to growth at least in-line with its defense peers over the coming years, while the stock trades at a significant discount,” wrote the analysts.

For LMT, the stock is below Wells Fargo’s price target, and their previous thesis has now “mostly played out.”

“While we still see only modest growth for LMT in the coming years, consensus factors this in (2-3% YOY growth), while its valuation doesn’t price much in at ~15x N12M PE, down from >20x late last year,” said Wells Fargo, adding that “2024 cash will get a modest benefit from higher F-35 deliveries delayed from 2023 (~$300M).”