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.

About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).