Lockheed Martin has limited upside, L3Harris the new tactical value play at Morgan Stanley

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By Sam Boughedda 

In a note to clients Thursday, Morgan Stanley analysts cut Lockheed Martin (NYSE:LMT) to Equal-Weight from Overweight and upgraded L3Harris Technologies (NYSE:LHX) to Overweight from Equal-Weight.

The analysts also increased the firm's price target on Lockheed to $542 from $506 and L3Harris' price target to $278 from $263 per share.

They said in a note that defense stocks outperformed the S&P 500 by 33% YTD as Russia/Ukraine conflict and great power flare-ups have fueled a heightened global threat environment in 2022. They expect 2023 will continue to be driven by geopolitical risk perceptions as "the most significant growth from recent higher defense spending commitments do not begin to materialize until the 2024-2025 timeframe."

On Lockheed, they said: "LMT had been our favored tactical value play in 2022, but we now downgrade from OW to EW as strong QTD price performance (+19% vs. the S&P +10%) provides more limited upside. Though we remain bullish on LMT's portfolio, we expect recent outperformance to cool as the most significant portion of the company's accelerated share buyback program (~$8bn in 2022; ~$4bn in 4Q22) expires at year-end."

On L3Harris, the analysts stated: "At a current 20% discount to peers, we see LHX as the new tactical value play entering 2023 and upgrade the name to OW from EW. While we see slightly more risk to numbers for LHX in 2023 given supply chain dynamics, risk/reward has grown more favorable as the valuation gap has grown too large, in our view."