Lang: RTX, NOC Ready for a Defense Stock Rebound After Earnings

Sam Vardis (0:00)

Welcome back to Morning Trade Live, I'm Sam Vardis. Let's go inside out on today's earnings in the defense sector. Joining us to do that is Bob Lang, Chief Options Analyst and Founder of Explosive Options. Bob, always nice of you to join us. So we've had a busy morning as far as industrial earnings here. RTX, GE and Northrop Grumman, all raising their guidance. What does that tell you?

Bob Lang (0:21)

Great to see you, Sam. So I think it tells a lot about where the demand is for these defense companies.

We heard it from Northrop Grumman this morning and RTX as well, too, saying that strong demand across the world, not just in the United States here, Sam, but also in Asia and Europe. They're seeing robust orders coming in, record backlog for Northrop Grumman, strong cash flows for RTX. And listen, you know what? I mean, these stocks have been beaten down for the past three to four months, and I think it's time to start getting into some of these aerospace names.

Sam Vardis (0:56)

So do you think the bottom is in?

Bob Lang (0:59)

I think the bottom is in here, Sam. I think we see the XAR, which is the Aerospace and Defense ETF, recently hit a bottom and it looks like it's probably ready to at least go sideways if at worst and up at best. So this is a group that has been punished lately. And frankly, I really don't understand why, because there's going to be a replenishment from the Defense Department coming up sometime soon. It's got to be at least in 28, 28 or 2029 These companies have produced a lot of weapons for the United States and they have depleted a lot of the weaponry in this war in Iran. So we have to restock some of that and that's just kind of a no brainer. But of course, with the advent of AI and some of these other initiatives that these companies are implementing, it's going to help increase their revenues, increase their margins and decrease their costs along the way.

Sam Vardis (1:59)

Do you think it was rising treasury yields or some concerns around what it could mean as far as the military budget for the midterms, as far as some of these stocks were concerned? Because I guess, well, it's a bit of a head scratcher as to why these had such a tough year. I guess it's important to try to get to the bottom of it, and just in case some of those fears haven't exactly abated.

Bob Lang (2:22)

Well, I think the budget part for defense has been a thorn in the side of the Republicans for the past couple of years. I think that if the Democrats get some leadership in November, when the midterms happen, I think it's going to be increasingly difficult for them to pass some legislation that will increase the budgets for defense and in turn increase spending to names like Lockheed Martin, which was going to report later this week, RTX and General AMX and these companies. I do think though that the prices are somewhat washed out here. Again, there's the valuation issue. Northrop Grumman is now trading at 18 times forward earnings. That is a cheap and inexpensive price for Northrop Grumman, historically trading in the mid 20s. I think that this company is selling at a discount. Also, RTX, basically where it was when they reported earnings in July. They had blowout earnings in July. They had blowout earnings today and, again, increased cash flow, increased backlogs.

Across their series of companies like Pratt & Whitney and Collins Aerospace are seeing growth across the board.

So I don't see why this is not a great time if it's not the best time to be buying some of these names.

Sam Vardis (3:48)

Is there any other reasons why you like RTX, why that's one of your favorites in the group? Just quickly.

Bob Lang (3:54)

Yeah. So, you know, Pratt & Whitney came out and said that their business is blowing on the doors out.

Also, Collins Aerospace said that their business across Europe and across Asia is extremely strong. And, you know, they have a good strong dividend. Again, the growth here in RTX has been real good. Since they spun off Otis and Carrier, they're a much leaner company, and they're really focused in on aerospace and defense. And I think this is probably the best in class name right here.

Sam Vardis (4:29)

All right. Bob, always appreciate it. Thanks so much for joining us today in your breakdown. Really busy morning in the defense world right now. Bob Lang from Explosive Options. Let's trade RTX with Tom White, host of Fast Market. So Bob laid it out there as to why this is one of his favorites across the space. We are up over 5% year to date. So faring better than the Northrop Grumman, for instance. Tom, just walk us through an example trade.