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Defense Stocks Set to Gain After Strike on Saudi Oil Facility

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Major U.S. aerospace and defense stocks scaled new highs this week, after drone attacks destroyed some oil installations in Saudi Arabia during the weekend. The sudden strike by twenty-five drones and missiles, per CNBC, hit the world’s largest crude oil processing facility, forcing Aramco to cut down its production by almost 50%.

As expected, this uncertainty caused oil prices to soar, which, in turn, resulted in a slump in the broader market indices. However, the majority of the U.S. defense stocks moved north. Evidently, the Zacks Aerospace sector, which houses defense primes, moved up 1.6%, over the past couple of days, outperforming the S&P 500’s decline of 0.2%.

Who is to Blame?

While Yemen’s Houthi rebels have claimed responsibility for the latest drone attack, the U.S. administration has been blaming Tehran for launching the missiles. Saudi officials have also cast their doubt over Houthi’s claim and pointed fingers toward Iran. Although Iran has blatantly denied such allegations, it is the advanced nature of the strike, which has led to assumptions that either Iran has launched the missiles or  backed Houthi rebels indirectly.

Adding more fuel to the theory of Iran’s participation, Saudi coalition spokesman Col. Turki al-Malik claimed that the drones used in the attacks were Iranian delta-wing unmanned aerial vehicles. This has given a golden opportunity to the U.S. administration to accuse Iran, a nation with which it has been involved in a long-standing conflict.

What’s the Connection With U.S. Defense Stocks?

The situation has once again increased the need for Saudi Arabia to strengthen its air defense missile systems. This is good news for defense majors as Saudi Arabia is the largest buyer of U.S. weaponries. According to the Stockholm International Peace Research Institute, Saudi Arabia accounted for 18% of U.S. arms sales in the past five years, totaling around $9 billion. The latest attack can lead Saudi Arabia to strike fresh weapons delivery deals with U.S. defense primes.  

Now, it is imperative to mention that the U.S. administration is waiting for Riyadh to determine who launched the strikes. It goes without saying that if Iran is found to be responsible for the strike, it would once again escalate tensions between the United States and Iran. In fact, the relation between these two nations soured after Trump implemented sanctions against Iran, targeting the Islamic Republic’s currency and key industries in August 2018. Moreover, this June, Trump came close to launching military strikes against Iran after it shot down a U.S. drone.

Meanwhile, even if Iran is not found guilty, Saudi Arabia is expected to boost its arsenal anyway as Houthi rebels have threatened to continue attacks on Saudis. U.S. defense stocks are therefore set to benefit, given the current geopolitical situation in Saudi Arabia.

Stocks in Focus

In May 2017, Trump signed an arms deal worth $110 billion with Saudi Arabia. This deal involved major U.S. defense stocks, Lockheed Martin Corp. (LMT - Free Report) , The Boeing Company (BA - Free Report) and Raytheon Company (RTN - Free Report) , which were direct suppliers of weapons to Saudi Arabia under this multibillion-dollar contract. Following the drone strike on Aramco, these stocks have witnessed an upside. We urge investors to keep these stocks in their watchlist, based on their strong fundamentals and the possibility of further upside in the event of a direct military conflict.

Pentagon’s primary contractor, Lockheed Martin, surpassed the Zacks Consensus Estimate for earnings in the last four quarter with an average of 16.03%. Its earnings are expected to grow 7.1% in the long term. Its shares have gained 3.2% since Sep 13. The company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

U.S. jet major, Boeing, surpassed the Zacks Consensus Estimate for earnings in the last four quarter with the average being 21.12%. Its long-term earnings growth rate is pegged at 8.3%. Its shares have gained 1.8% since Sep 13. The company carries a Zacks Rank #3.

Missile maker, Raytheon, surpassed the Zacks Consensus Estimate for earnings in the last four quarters with the average being 10.58%. Its long-term earnings growth is estimated to be 10.7%. Its shares have risen 0.8% since Sep 13. The company carries a Zacks Rank #3.


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