Palantir Technologies reported another strong earnings result this month, sending its stock soaring and pushing its market capitalization above every defense contractor in the world. But its high valuation is leading some analysts to point investors toward cheaper alternatives in the defense sector, according to a report from Yahoo Finance.
Palantir's price-to-earnings and price-to-sales ratios have climbed sharply after the stock gained hundreds of percentage points over the past few years. That has shifted attention toward two legacy defense contractors, Lockheed Martin and General Dynamics, both of which carry lower valuations and benefit from long-term government contracts.
Lockheed Martin is the maker of the F-35 fighter jet, the current workhorse aircraft for the United States and its allies. The F-35 program carries long lead times and maintenance requirements that are expected to produce recurring revenue for decades. Lockheed is also the manufacturer of THAAD missile interceptors, which have seen heavy use during the conflict with Iran.
The United States awarded Lockheed Martin a $35 billion contract to quadruple the production rate of THAAD interceptors. That contract drove Lockheed's total backlog to a record $230 billion at the end of last quarter. Management upgraded its full-year revenue guidance to over $80 billion and raised its free cash flow forecast to over $7 billion.
General Dynamics holds a different but equally durable position in the defense budget. The company serves as the primary contractor for the U.S. Navy's nuclear-powered and nuclear-armed submarines. The new Columbia-class submarines will be built over the next two decades, carry a service life extending into most of this century, and cost nearly $10 billion each to construct.
Beyond submarines, General Dynamics operates Gulfstream, a leading private aviation company, and holds contracts for software, cybersecurity, and other IT services for the federal government. The company's backlog rose to $136.5 billion last quarter. Its book-to-bill ratio reached 1.4, meaning that for every dollar billed under contracts, it booked $1.40 in new contract value.
Both companies are positioned to benefit from continued growth in U.S. defense spending, with backlogs that stretch well into the next decade and in some cases beyond.
