Morgan Stanley: Northrop replaces Lockheed as top defense pick

Morgan Stanley: Northrop replaces Lockheed as top defense pick

In a significant shift in the defense sector, Morgan Stanley analysts have replaced Lockheed Martin with Northrop Grumman as their top pick. This decision comes on the heels of Northrop Grumman's robust second-quarter earnings report, which showcased strong performance and promising growth prospects. The change in recommendation reflects a reassessment of the two companies' strategic positions and market potential.

Northrop Grumman's earnings report, released on July 22, 2025, highlighted several key achievements. The company reported a 18% year-over-year growth in international sales, driven by increased demand in the Middle East and Europe. CEO Kathy Warden emphasized the company's ability to respond quickly to customer needs and capitalize on growing defense spending globally [2].

In contrast, Lockheed Martin's Q2 2025 earnings report revealed a 79% year-over-year plunge in earnings per share, primarily due to program-related losses. The company faced significant setbacks in classified aeronautics programs and international projects, such as the Canadian Maritime Helicopter Program and the Turkish Utility Helicopter Program [3]. Despite these challenges, Lockheed Martin reaffirmed its full-year sales and free cash flow guidance, indicating resilience in high-priority areas [3].

The Morgan Stanley analysts' decision to upgrade Northrop Grumman's rating reflects its strategic positioning and the company's ability to capitalize on global defense spending trends. Northrop Grumman's diversified portfolio and investments in production capacity, such as doubling solid rocket motor output by 2029, position it well to meet rising demand [2].

Lockheed Martin, on the other hand, remains heavily exposed to aeronautics and large-scale systems, with execution risks associated with hypersonic and AI initiatives. The company's ability to navigate these challenges and refine its execution model will be crucial for long-term success [3].

Investors seeking stability and predictable cash flows may prefer Northrop Grumman, given its diversified portfolio and strong performance in international markets. Those willing to take on more risk may find opportunities in Lockheed Martin's strategic alignment with Pentagon modernization priorities and its robust backlog [3].

References:

[1] https://www.investors.com/news/lockheed-martin-rtx-general-dynamics-defense-earnings-momentum-q2-2025/
[2] https://www.benzinga.com/markets/earnings/25/07/46566039/northrop-grumman-eyes-multi-billion-dollar-opportunities-in-middle-east-air-defense-europe-amid-regional-instability
[3] https://www.ainvest.com/news/lockheed-martin-earnings-disappointment-test-defense-sector-resilience-2507/
[4] https://247wallst.com/investing/2025/07/22/live-northrop-grumman-up-3-after-releasing-earnings/