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Investing.com -- RBC analyst Ken Herbert downgraded Lockheed Martin (NYSE:LMT) to Sector Perform from Outperform on increased risks to the F-35 program and a lack of near-term catalyst, while upgrading Northrop Grumman (NYSE:NOC) to Outperform on improved sentiment and favorable positioning amid shifting U.S. Department of Defense (DoD) priorities.
Herbert said Lockheed’s F-35 program faces greater headline risk for international sales and growing U.S. budget pressures.
While order cancellations remain unlikely, concerns about future procurement funding and uncertainty around incremental European orders weigh on sentiment.
The ‘kill switch’ headline risk should be significant in Europe.
The recent loss of the Next (LON:NXT) Generation Air Dominance (NGAD) contract to Boeing (NYSE:BA) has also raised concerns about Lockheed’s long-term growth."The expected lack of any 6th generation fighter program involvement is a long-term drag," Herbert added.
Despite a strong missile franchise and attractive valuation, he believes these factors will keep sentiment subdued. RBC lowered its price target on Lockheed to $480 from $550.
Herbert upgraded Northrop citing strong execution on the B-21 bomber program and its positioning in nuclear modernization efforts.
"We believe the nuclear triad will remain a high priority for the DoD, and we specifically see a greater focus on the B-21 as a net positive,” he said, adding that Northrop’s relative positive sentiment should support continued upside.
With Boeing’s NGAD win, Herbert sees Northrop as the most likely choice for the Navy’s F/A-XX program to maintain industrial base diversification. d
Analyst believe a F/A-XX award to NOC would be a positive catalyst. RBC raised its price target on Northrop to $575 from $540.
Lockheed shares have struggled with sentiment overhangs, while Northrop is up about 8% year-to-date, reflecting improving investor perception.