Defense sector: Lockheed, Raytheon, Northrop, our scores
2026-06-23 · By Lubin Danilo, founder of Lubin Investment
Major US defense companies score 6-8 out of 10 in our screener — respectable but rarely perfect. Fixed-price government contracts, long development cycles, and limited organic growth explain why this sector is structurally challenging for our quality methodology.
Real defense sector scores in our screener
| Ticker | Score | Main weaknesses |
|---|---|---|
| LMT | 6/10 | Slow growth, declining FCF/share, compressed margins |
| NOC | 6/10 | Poor earnings-to-cash conversion, limited growth |
| RTX | 8/10 | Valuation above our entry target (only fail) |
| LHX | 7/10 | Growth and margins below our thresholds |
| HEI | 9/10 | High valuation (DSO, high FCF multiple) |
| TDG | 8/10 | High debt, DSO, valuation |
Why defense is structurally hard for our method
First, government contracts are fixed-price (LPTA). Defense primes cannot freely raise prices. Second, development cycles are very long — 10-15 years from contract award to F-35 delivery. FCF is near-zero during development. Third, the US defense budget is voted annually — uncertainty weighs on long-term planning.
Raytheon (RTX): best defense score at 8/10
RTX stands out with an 8/10 score — the best in pure defense. The only criterion in tension is valuation: at $181.83, the price is 14.8% above our entry target. RTX benefits from unique diversification: commercial aircraft engines (Pratt & Whitney), missile systems (Raytheon), avionics (Collins Aerospace). This civil/military diversification smooths budget cycles.
Niche component makers do better: HEI and TDG
Heico (HEI, 9/10) and TransDigm (TDG, 8/10) score better than the prime contractors. Why? They supply replacement parts for military and commercial aircraft — less regulated than prime contracts, with high pricing power. HEI holds near-monopoly positions on certain FAA-approved alternative parts.
FAQ
Is RTX recommended for buying under your method?
RTX has an excellent fundamental profile (8/10) but the current price exceeds our entry target by 14.8%. We're waiting for a price correction or FCF improvement to create a buying opportunity.
Why is LMT only 6/10 despite being a global leader?
Lockheed Martin has near-stagnant revenue growth, poor earnings-to-cash conversion (risk-sharing contract provisions), and compressed margins on the F-35 program. Our method is demanding on these fundamental quality criteria.
Does Europe's defense spending increase benefit these companies?
Partially. LMT, NOC, RTX sell to European governments. Missile, F-35, and defense system deliveries are increasing. But contract cycles remain long (3-5 years to actual delivery) and FCF impact takes time to materialize.
How to choose between HEI and TDG for a long-term investor?
HEI (9/10) has the best fundamentals but is very expensive (FCF multiple ~50x). TDG (8/10) is also expensive with significant debt. Both are quality names but neither is currently in our buy zone.
Which defense sub-sectors pass your filter best?
Niche component makers (HEI, TDG) and dual civil/military players (RTX) perform best. Pure-play prime contractors (LMT, NOC) are penalized by their dependence on fixed-price government contracts.
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About the author
Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I have analyzed stocks through their fundamentals for several years and invest my own money with this method. I codified it into a tool that judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).