For over a year, I’ve been shouting into the void about defense stocks being too pricey. At first, it seemed like I was right-shares of the big defense companies tanked shortly after I opened my mouth. Now, nearly a year later, things have gotten… interesting. Better? Worse? Both, really.
The better: Defense stock prices bounced back. If you’re already in, congrats, you’re probably not crying into your coffee. The worse: These stocks are now more overpriced than a midtown condo. For anyone trying to buy in, it’s like ordering a salad and getting a whole chicken.
What history says about defense stocks
How do I know this? I stared at numbers until my eyes bled. Over 10 years (2004-2013), another 10 (2014-2023), and a 20-year span (2004-2023), I calculated average EV/S ratios for 10 major defense companies. The results? A masterclass in why no one should trust anything.
Back in the early 2000s, defense stocks traded at about 1x sales. Then, like a bad relationship, they kept getting more expensive. For the past 20 years, they’ve averaged 40% above sales. That’s my “fair value” for now. If that sounds like a guess, you’re not wrong.
| Average enterprise value-to-sales ratio (EV/S) from: | |||
|---|---|---|---|
| 2004-2013 | 2014-2023 | 2003-2023 | |
| Boeing (BA) | 0.89 | 1.83 | 1.36 |
| General Dynamics (GD) | 1.04 | 1.68 | 1.36 |
| Huntington Ingalls (HII) | 0.51* | 1.14 | 0.64* |
| Kratos Defense & Security Solutions (KTOS) | 0.97 | 2.21 | 1.59 |
| Leidos Holdings (LDOS) | 1.5 | 2.21 | 1.34 |
| L3Harris Technologies (LHX) | 1.44 | 2.84 | 2.14 |
| Lockheed Martin (LMT) | 0.81 | 1.78 | 1.30 |
| Northrop Grumman (NOC) | 0.74 | 1.94 | 1.34 |
| RTX Corp (RTX) | 1.42 | 2.07 | 1.74 |
| Textron (TXT) | 1.31 | 1.17 | 1.24 |
| Average | 1.06 | 1.89 | 1.40 |
Now, here’s the kicker: These 20-year averages are way lower than today’s prices. If you’re trying to figure this out, I’ve included both EV/S and P/S ratios. Because nothing says “I care” like giving you two numbers to compare.
| EV/S today | Price-to-sales ratio today | |
|---|---|---|
| Boeing | 2.74 | 2.21 |
| General Dynamics | 1.86 | 1.71 |
| Huntington Ingalls | 1.13 | 0.91 |
| Kratos Defense & Security Solutions | 9.20 | 8.87 |
| Leidos Holdings | 1.62 | 1.38 |
| L3Harris Technologies | 2.91 | 2.40 |
| Lockheed Martin | 1.69 | 1.42 |
| Northrop Grumman | 2.43 | 2.08 |
| RTX Corp | 2.95 | 2.51 |
| Textron | 1.16 | 1.03 |
| Average | 2.77 | 2.45 |
What this means for defense stock investors
So what’s changed since last month? Every stock, except Lockheed Martin, has gotten more expensive. Lockheed had a “profit miss” and is still recovering. The rest? They’re like a party where everyone’s bought a second round and no one’s paying attention to the bill.
Again, this sounds great for current owners. But these valuations are like a ticking time bomb. The average EV/S ratio is 2.77-nearly double what it should be. If you’re buying now, you’re basically hoping the market doesn’t realize it’s a trap.
Will this crash tomorrow? Unlikely. With wars, tensions, and conflicts everywhere, investors might keep betting on defense stocks. But with valuations this extreme, I don’t see a reason to expect them to go higher. In fact, I’d bet they’ll underperform the S&P 500 by a mile over the next decade.
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2025-08-17 13:12