Rothschild & Co Redburn initiated coverage of four U.S. defense companies on Tuesday, assigning “buy” ratings to Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC) and Kratos (NASDAQ:KTOS), while starting AeroVironment (NASDAQ:AVAV) at “neutral”.
The brokerage cited the proposed $1.5 trillion U.S. military budget for fiscal 2027 as a potential source of additional demand for defense contractors.
According to Redburn, the Pentagon’s request is approximately 49% above the previous year’s level and 34% higher than the base discretionary budget request. If approved in full, the brokerage estimates that U.S. military spending would increase to around 5% of gross domestic product from 3.5%.
The budget remains subject to the legislative process. Redburn noted that the proposal relies on both the annual base budget and a reconciliation request, while the fiscal 2027 National Defense Authorization Act has yet to pass. The U.S. government is operating under a continuing resolution through at least December, which the brokerage expects to be extended.
Redburn Sets $650 Price Target on Lockheed Martin
Redburn assigned Lockheed Martin a $650 price target, representing approximately 29% upside from the share price referenced in its analysis.
The brokerage cited potential demand associated with replenishing munitions inventories and expects Lockheed’s Missiles and Fire Control segment to record growth in the mid-teens.
For fiscal 2026 through 2030, Redburn forecasts compound annual revenue growth of 5.8% and earnings-per-share growth of 9.2%.
The forecasts and price target represent Redburn’s estimates rather than company guidance.
Northrop Grumman Given $680 Price Target
Redburn started Northrop Grumman with a $680 price target, implying approximately 41% upside based on the share price used in its analysis.
The brokerage expects the company’s B-21 and Sentinel programmes to contribute to revenue growth and margin expansion.
Redburn forecasts annual revenue growth of 6.8% and earnings-per-share growth of 8.3% between fiscal 2026 and fiscal 2030.
The brokerage also expects both Northrop Grumman and Lockheed Martin to pause share repurchases in the near term before resuming them in fiscal 2028.
Kratos Rated Buy While AeroVironment Starts at Neutral
Kratos received a “buy” rating and a $70 price target. Redburn said the company could benefit from Pentagon efforts to expand the U.S. defense industrial base.
The brokerage forecasts annual revenue growth of 18% and adjusted core earnings growth of 25.3% between fiscal 2026 and fiscal 2030.
Redburn assigned AeroVironment a $165 price target, representing approximately 17% upside, but started the shares at “neutral”. The brokerage said it sees greater near-term upside and lower risk elsewhere within its coverage.
Redburn expects fiscal 2027 to be a transition year for AeroVironment, forecasting broadly flat earnings and negative free cash flow as the company carries out a capital investment programme, followed by an improvement in fiscal 2028.
Missile Inventories Cited as Potential Demand Driver
Redburn also identified replenishment of interceptor missile inventories as a potential source of defense demand.
Citing estimates from the Center for Strategic and International Studies, the brokerage said the U.S. inventory of PAC-3 interceptors may have declined to between 759 and 827 by July 27 from 2,330 before the Iran conflict.
Redburn said U.S. aerospace and defense stocks had underperformed the S&P 500 by approximately 25% over the preceding six months.
The brokerage expects sector volatility and a downward trading bias ahead of the U.S. midterm elections, citing polling that it said indicated a greater probability of Democrats controlling both chambers of Congress. Redburn said such an outcome could create uncertainty around reconciliation or supplemental defense spending requests. These statements represent the brokerage’s political and market assessment rather than established outcomes.