SpaceX Gets All the Attention, but These 3 Under-the-Radar Defense Stocks Have Stronger Fundamentals

In many ways, Space Exploration Technologies (NASDAQ: SPCX) is a company without peer.

SpaceX has the world's best rockets and the only reusable ones (Falcon 9 and Falcon Heavy) that have been consistently proven to be able to fly and return to fly time and time again. (For the time being, at least. Blue Origin, keeps trying!)

SpaceX is building the world's biggest rocket ever, the Starship, making more and more progress with each test flight, en route to ultimately turning the vessel into a lunar lander -- and then a Mars lander, too.

It's got the world's biggest satellite internet system, Starlink, may soon have the biggest satellite direct-to-cellphone system as well, and recently conducted the biggest initial public offering (IPO) in history.

It makes perfect sense that SpaceX is getting all the attention from the aerospace and defense press these days -- but that doesn't mean SpaceX stock is the best place to put your money. In fact, it doesn't take much more than a simple stock screener to find a good handful of defense stocks with stronger fundamentals: Lockheed Martin (NYSE: LMT), Huntington Ingalls (NYSE: HII), and Leidos (NYSE: LDOS).

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Lockheed Martin

Starting from the top with the biggest pure-play defense contractor in the world, Lockheed Martin boasts $4.8 billion in annual profit and an even more powerful free-cash-flow (FCF) score -- $5.7 billion during the past year. Both numbers outclass SpaceX, which is unprofitable ($8.7 billion in net losses last year) and burning cash -- $19.8 billion in negative FCF, twice as much as the net loss.

Lockheed makes most of its money selling defense systems such as F-35 fighter jets and Patriot missiles. But even in space -- SpaceX's forte -- Lockheed runs a profitable operation building satellites and providing space services, which generated $1.3 billion in pretax earnings during the past year; according to data from S&P Global Market Intelligence, SpaceX's marquee business had a $1.2 billion loss in the same period.

Priced at 21 times FCF today, with a 2.7% dividend yield and a long-term annual growth rate forecast to approach 19%, Lockheed stock looks better than fairly priced to me today.

Huntington Ingalls

Significantly smaller and more specialized than Lockheed Martin, military shipbuilder Huntington Ingalls did just $12.8 billion in sales during the past 12 months (about a sixth as much as Lockheed), earned $605 million in profit, and generated $792 million in positive FCF. So once again, we've got an old-school defense contractor here that's not only generating cash where SpaceX is burning it, but generating more cash than it reports as net income.

Huntington Ingalls doesn't have an aerospace business, focusing primarily on shipbuilding at Newport News, Virginia, and Ingalls, in Mississippi, which combined generate more than 75% of its sales. The company's also got a fast-growing mission technologies business, providing command-and-control and cyber technologies, and that business's sales have more than doubled during the past year.

Huntington stock costs less than Lockheed, at only 14 times FCF. With a 1.9% dividend yield and a 13.5% projected growth rate, the company appears similarly undervalued.

Leidos

Best of all (for value investors) may be defense technology specialist Leidos (which also happens to own a space subsidiary after acquiring Dynetics in 2020). Leidos stock isn't expected to grow very fast -- just 5.6% annually during the next five years. It offers the lowest dividend of the three stocks named above -- just 1.6%. But after underperforming the stock market during the past year, Leidos stock trades for an ultralow 7.2 times FCF today, which is cheap enough to put it on my radar -- and the cheapest valuation by far of these three defense stock value plays.

Indeed, with $17.3 billion in annual sales but a market capitalization of only $13.4 billion, Leidos is the only one of these stocks to hit my personal target valuation for defense stocks: It trades at less than 1 times annual sales (0.8, to be precise).

Based on their strong fundamentals and low stock prices, I fully expect Lockheed, Huntington Ingalls, and Leidos to outperform SpaceX stock during the next few years -- and Leidos to outperform most of all.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Leidos. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.