Each of the major defense contractors thinks it is better than its competitors.  It’s a point of pride.  Moreover, it’s endemic to the corporate culture of each company.  But from an outsider’s (hopefully) more objective point of view … which one is Top Gun?

This is important because each company seeks to woo analysts and investors.  Each seeks to maximize the metrics perceived to be important to stock analysts.  So when an outsider analyzes the companies and publishes the results, it’s worth taking a look at.

Over at Seeking Alpha, “Diesel” compared Raytheon, General Dynamics, Northrop Grumman, and Lockheed Martin to “find out which one provides the best value” to shareholders.  Note that “Diesel” did not include Boeing in the comparison “because less than half of BA's revenues come from the defense industry.”

“Diesel” compared the four mega-defense contractors on ten metrics, including profit margins, Return on Equity (ROE), Debt/Equity Ratio, Price to Book Ratio, Current Dividend Yield, 5-Year Average Dividend Yield, Payout Ratio, 5-Year Dividend Growth, Price/Earnings Ratio, and 52-Week Stock Price Change.

One problem with “Diesel’s” analysis is that each metric had the same weight.  In other words, in the analysis ROE is equal to 52-Week Price Change.  In reality, some metrics are more important than others.  Moreover, Return on Invested Capital (ROIC) was not included in the analysis; that’s an important metric to defense contractors.

But enough of the methodology, let’s get to the results.  Of course, you can review “Diesel’s” article right here, if you want more detail.

1. Profit Margin—Winner:  General Dynamics, with a profit margin of 8 percent.

2. ROE—Winner: Lockheed Martin, with a ROE of 80 percent, beating the competition by a wide margin.

3. Debt/Equity Ratio—Winner: General Dynamics, edging out Raytheon, and Northrop Grumman.

4. Price/Book Ratio—Winner: Northrop Grumman.

5. Dividend Yield—Winner: Lockheed Martin, with a current yield of roughly 4.75%.

6. 5-Year Average Dividend Yield—Winner: Northrop Grumman.

7. Payout Ratio—Winner:  General Dynamics, with a ratio of less than 25%.

8. 5-Year Dividend Growth—Winner:  Lockheed Martin had the most dividend growth over the past five years.

9. Price/Earnings Ratio—Winner:  Raytheon and Northrop Grumman tied, with General Dynamics just behind the two.

10. 52-Week Price Change—Winner:  Lockheed Martin.

Overall Winner:  Lockheed Martin

“Diesel” ends the analysis with the following statement—

Lockheed Martin is a strong buy with these fundamentals. This is good stock for long term (3-10 years) value investors. … In the last decade, there is a linear growth [in dividend yield] and the stock never paid less than the year before in dividends. During the same time, the stock's capital gain was about 64%.

The thing is, “Diesel” is so focused on the trees, he has no awareness of the forest.  In addition to the methodological concerns we noted above, there is no discussion of the macro issues facing the industry.  There is no mention of the looming near-term cuts to the defense budget, or of the ability to export aircraft and arms given the possibility of a European recession.  In other words, “Diesel” is focused on historical metrics to the exclusion of obvious and near-term market issues facing the industry.

They say that “past performance is no guarantee of future returns” on most prospectuses.  We agree.  Caveat emptor.