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Trump-Saudi Ties Hint at Arms Deal: 3 Defense Stocks in Focus

Is (AMTD) Outperforming Other Finance Stocks This Year?

The latest visit of Saudi crown prince Mohammad Bin Salman to the White House proved to be beneficial for the U.S. defense stocks. President Trump was all praise for the prince and mentioned that Saudi Arabia has evolved as a ‘big purchaser’ of American weaponries. Trump mentioned that the kingdom purchased planes, missiles and frigates from U.S. companies worth $12.5 billion, per the deal signed in October 2017 (per Bloomberg).

In response to Trump’s plaudits, Salman stated that he is keen to take the “really deep” relationship with the United States forward and is considering to invest $400 billion in the United States over the long run. Notably, the State Department’s latest announcement of Trump administration’s likely approval of $1-billion arms sale to Saudi Arabia is likely to strengthen ties between the nations.

Details of the Deal

The White House informed the Congress on Mar 22 that it plans to approve a $1-billion arms sale to Saudi Arabia, a package that includes about 6,700 U.S.-built anti-tank missiles.

The sale also includes providing support, maintenance and spare parts for American tanks, helicopters and other equipment already in Saudi Arabia's arsenal. This deal includes the possible sale of 6,600 TOW anti-tank missiles and an additional 96 jets for training for $670 million. Per the deal, helicopter maintenance services and spare parts for military vehicles will also be provided.

The State Department also announced that it is planning to approve the possible sale of Abrams tanks and armored vehicles worth $300 million to Saudi Arabia.

Per Reuters, the Department also gave the green light to the proposed sale of equipment and services for military helicopters to Saudi Arabia for $106.8 million.

Why Saudi Arabia?

Saudi Arabia is an oil rich region and is America's one of the most important partners in the Middle East. The year 2017 saw the two nations signing an arms deal worth $110 billion, which held a potential value of $350 billion over 10 years.  In the past nine months alone, the United States has garnered $54-billion through foreign military sales to Saudi Arabia (according to CNBC).

Trump’s latest move to woo the Saudi prince and in turn coax him to invest more in the nation, particularly in defense space, seems to be a strategic one — not only economically but also politically. While Trump believes that higher investments from Saudi Arabia will create jobs for 40,000 Americans, it seems like strengthening relationship with Saudis will help America to counter Iran’s influence in the Middle East, including the Islamic Republic’s alliance with Russia.

Defense Stocks to Remain on Growth Trajectory

The top-notch defense majors in the United States like Lockheed Martin LMT, Boeing BA and Raytheon RTN are already gaining significantly, courtesy of the last year’s deal.  With the latest $1-billion deal, that the State Department is determined to approve, and more such others expected to follow through, we may expect the U.S. aerospace and defense stocks to gain substantial traction in the coming days.

While Raytheon, manufacturer of the TOW missiles will definitely gain the most from this deal, defense primes, who already enjoy a good rapport with the Saudis, will be the biggest beneficiaries. Moreover, since these stocks also boast strong financials they are worth keeping in your watch list.

Lockheed Martin is the largest defense contractor in the world. Of the latest contracts that the company won in relation to Saudi Arabia, worth mentioning are the $945-million deal for exercising production option for fiscal 2018 Patriot Advanced Capability-3 (PAC-3) missiles in December 2017 and another $524-million contract for PAC-3 missiles in February 2018.

Notably, the company surpassed the Zacks Consensus Estimate in the trailing four quarters with an average positive earnings surprise of 4.62%. It boasts a solid long-term earnings growth rate of 7.3% and its Zacks Consensus Estimate for 2018 earnings has improved 11.8% in the last 60 days.

The company carries a Zacks Rank #3 (Hold).

Boeing is a premier jet aircraft manufacturer and is one of the largest defense contractors in the U.S. Of the latest contracts that the company won in relation to Saudi Arabia, worth mentioning are the $240-million deal that Boeing won for the Royal Saudi Air Force airborne warning and control system modernization program phase 1 in October 2017 and a $193.6-million contract for the production of Increment 1, Lots 12-14 Small Diameter Bomb.

The company trumped the Zacks Consensus Estimate in the trailing four quarters with an average positive earnings surprise of 20.69%. It boasts a solid long-term earnings growth rate of 13.8% and its Zacks Consensus Estimate for 2018 earnings has improved 16.7% in the last 60 days.

The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Raytheon is a defense major with a diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems, and technical services. Of the latest contracts that the company won in relation to Saudi Arabia, worth mentioning is the $302.4 million deal for procurement of 618 Joint Standoff Weapon air-to-ground missiles (AGM-154 Block III C), containers, component parts/support equipment (spares) and engineering technical assistance, in December 2017.

Notably, the company topped the Zacks Consensus Estimate in the trailing four quarters with an average beat of 6.36%. It boasts a solid long-term earnings growth rate of 10.9% and its Zacks Consensus Estimate for 2018 earnings has improved 11% in last 60 days.

The company carries a Zacks Rank #3.

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