You remain bullish on several names under coverage in the Defense industry. Can you go into why for a couple of these?

Certainly. Lockheed Martin (LMT) appears well positioned to continue to benefit from strong defense outlays through 2008-09. Northrop Grumman (NOC) offers a strong program portfolio positioned to take advantage of growth areas in the Defense budget. Both Lockheed and Northrop look to benefit from an ongoing share repurchase program.

What should investors know about Lockheed Martin beyond what you’ve already stated?

Solid operating results, higher margins particularly in the electronic systems segment, via existing and new contracts, both domestic and international, collectively offset lower fighter jet business, and continue to deliver strong earnings and cash flow growth. Management’s increased 2008 guidance supports the bullish outlook.

Our six-month target price on LMT shares is $75.84. Price appreciation to our near-term valuation target, coupled with the increased $0.57 per share quarterly dividend, which we consider sustainable and secure based on low projected earnings payouts, represents annualized total return potential of 26.0%.

In Northrop Grumman’s case, what are the main factors?

Favorable projected revenue, the acquisition of 3001 International, a favorable ruling regarding its BAMS contract, diversified revenue and earnings streams with strong growth and discounted relative valuation metrics collectively support our bullish outlook here.

For NOC common stock, we have a six-month target price of $54.75. We evaluate price appreciation to our near-term target and include the $0.40 per share quarterly dividend – again, which we deem secure and sustainable -- represents 24.1% upside potential.

Jon Kolb is a senior analyst covering the Defense industry for Zacks Equity Research.

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