The decades-old Israel-Palestine conflict over territory held sacred to both nations saw its deadliest escalation when Hamas initiated a widespread onslaught early morning on October 7. The calamitous events that unfolded that day led to the most significant loss of lives.
The Israeli cabinet officially declared war against Hamas the next day. This was succeeded by an order from the defense minister to the Israeli Defense Forces (IDF) to put Gaza under a complete siege. Subsequently, bombings in the Gaza Strip commenced, ensnaring the region in a harrowing humanitarian crisis. The Gaza Strip, home to 2.3 million Palestinians, is rapidly depleting its reserves of water, fuel, and other supplies due to the imposed Israeli aid blockade.
Rocket fire exchanges have become a daily occurrence between the two factions, with Israel urging over a million civilian Palestinians residing in northern Gaza to evacuate ahead of a potential ground incursion. Furthermore, the risk of conflict proliferation is high, as witnessed by escalating cross-border strikes in Lebanon and Syria.
Casualties keep mounting on both ends of the battlefield with little to no signs of peaceful negotiations, especially after the blast at a hospital in Gaza has further intensified the loss of innocent civilian lives.
Sectors Affected by the Conflict
Amid amplifying tensions in the Middle East, the world is simultaneously confronting the diplomatic turbulence spurred by the Russia-Ukraine conflict and global economic instability underpinned by stubborn inflation and escalating interest rates.
In situations of military conflict, defense corporations often witness a rise in earnings, an effect reflected in the upward trajectory of aerospace and defense stocks when geopolitical strife unfolds. Military contractors' shares soared in the Israel-Hamas conflict's immediate fallout, attracting institutional and individual investors. The iShares U.S. Aerospace & Defense ETF (ITA) has spiraled upward about 7% since the initial onslaughts on Israel earlier this month.
The potential for disruptions in oil supply increases during such times and usually results in abrupt surges in oil prices. Furthermore, geopolitical unrest persuades investors to avoid risky stock market investments and instead explore safe-haven or defensive assets as a precaution against heightened escalation or worldwide economic deceleration. These assets encompass U.S. Treasury bonds, gold, utilities, and energy.
UBS Wealth Management states, “In a scenario where the conflict expands and draws in other regional actors, we believe safe-haven assets, including U.S. Treasuries and gold, would gain further from investors' attempts to hedge against stronger escalation or a global economic slowdown driven in part by higher oil prices.”
Early reactions to the unrest saw oil prices rising by about 3%, a slight drop in stock futures, and a 1% climb in gold, while Treasury futures experienced a rise, consequentially diminishing yields.
Given this backdrop, we undertake an in-depth analysis of stocks Lockheed Martin Corporation (LMT), ChampionX Corporation (CHX), and Dundee Precious Metals Inc. (DPMLF) now.
Lockheed Martin Corporation (LMT)
Amid burgeoning global geopolitical tension, interest in military spending has not dwindled, fueled by the necessity to refresh existing conflict arsenals and prepare for future defense requirements. This situation benefits LMT, whose sizable order backlog has remained robust at $156 billion due to healthy domestic and international demands.
Bethesda, Maryland-based company LMT, with a market cap of over $111 billion, reported a better-than-anticipated third-quarter revenue and profit as geopolitical unease stimulated sustained demand for its military equipment. Consequently, the U.S. defense contractor shares rose about 2%.
The conflict in Ukraine has elicited a need for restocking weaponry such as shoulder-fired missiles, artillery, and other arms, providing a profitable avenue for U.S. defense-related firms to secure significant contracts from the Pentagon.
Among the sought-after hardware are LMT's offerings, particularly its guided multiple-launch rocket system and Javelin anti-tank missiles. These products, which LMT co-produces with defense firm Raytheon Technologies Corporation (RTX), have emerged as critical components supporting the Ukraine war efforts.
LMT executives highlighted the ongoing conflicts in Israel and Ukraine as potential catalysts for revenue growth in the foreseeable future.
Despite these circumstances, LMT's operations continue to reel from the effects of ongoing pandemic-linked labor and supply chain disruptions. These interruptions are particularly detrimental to the company's aeronautics division, renowned for manufacturing the advanced F-35 fighter jet. Sales at its aeronautics unit, the largest by size, saw a 5.2% year-over-year decline in the third quarter that ended September 2023.
However, despite these challenges, the defense giant reported a 1.8% year-over-year boost in net sales, achieving $16.88 billion. The Missiles and Fire Control unit, producing the High Mobility Artillery Rocket System, saw a 3.8% uptick from the year-ago quarter, reaching $2.94 billion. LMT's earnings per share stood at $6.73, exceeding estimates.
LMT remains a mature, low-growth entity boasting robust profitability. On the one hand, it has prospects for expanding margins through easing supply chains and executing legacy contracts. Concurrently, it carries uncertainties regarding the margin impact of a classified missile program discussed during the earnings call.
Analysts expect LMT’s revenue and EPS for the fiscal fourth quarter ending December 2023 to come at $17.94 billion and $7.25. It surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
Israel harbors significant ambitions to exploit its abundant offshore natural gas resources and establish a significant role as an energy hub in the Eastern Mediterranean, potentially becoming a central supplier to Europe. However, the surprise assault by Islamist militant group Hamas is causing Israel to falter, posing a global energy market disruption risk, most notably affecting regional gas supplies.
Following Hamas’ weekend attack, European natural gas and global oil futures spiked by 14% and 4%, respectively, reflecting accumulating apprehension and the potential escalation of conflict. This created ripples of uncertainty within the energy market.
Heightening global oil demand, combined with OPEC+ and Russia’s prolonged production cuts, have surged oil and gas prices, fostering favorable conditions for exploration and subsequent production activities. Recent oilfield service giant Baker Hughes report, indicates that the total U.S. rig count augments by two units to 624 for the week ending October 20, 2023.
Moreover, escalating oil prices can be attributed to concerns surrounding potential interference from Iran in the Strait of Hormuz, one of the most significant oil chokepoints in the world. Natural gas prices have risen due to Israel ceasing operations at an offshore production facility within the missile range of Gaza and a mysterious breach in a Baltic pipeline, which Estonian officials believe resulted from external influence.
CHX, a global provider of chemistry solutions, engineered equipment, and technologies to oil and gas companies worldwide, with an impressive market cap of over $6 billion, recently disclosed its third fiscal quarter results that ended on September 30, 2023.
For the quarter, its revenue stood at $939.78 million. Its net income attributable to CHX increased 236.9% year-over-year to $77.71 million, while adjusted EBITDA was $189.54 million, up 14.1% from the prior-year quarter.
Through its regular cash dividend of $17 million and $68 million of CHX’s share repurchases, it returned 52% of cash from operating activities and 74% of its FCF in the third quarter to the shareholders.
CHX expects its production-centric business portfolio, cost-reduction strategies, and digital innovation will yield financial growth. Encouragingly, progression is likely to continue within the international and offshore businesses.
Looking to the fourth quarter, CHX projects revenue between $930 million and $970 million and adjusted EBITDA between $187 million and $197 million. CHX's cash generation remains robust, demonstrating its intent to convert at least 50% of its adjusted EBITDA into free cash flow for the full year and reaffirming its commitment to distribute a minimum of 60% of said cash flow to the shareholders for the year.
Analysts expect CHX’s EPS for the fiscal fourth quarter ending December 2023 to increase 16.1% year-over-year to $0.50, while its revenue for the quarter is expected to come at $979.99 million. It surpassed the consensus EPS estimates in three of the trailing four quarters.
Dundee Precious Metals Inc. (DPMLF)
During periods of instability, as exemplified by the recent outbreak of the Israel-Hamas conflict, gold prices traditionally rise, affirming its reputation as a safe-haven asset. But these geopolitical-instigated spikes tend to be fleeting. Adrian Day Asset Management President, said, "Geopolitical rallies in gold tend not to last long. In the longer term, monetary factors are more important for the gold price."
Amid the economic slowdown by the Fed’s continual interest rate hikes since 2022, gold stocks have emerged as particularly enticing in 2023. Instability in emerging market currencies coupled with an ascendant U.S. dollar has illuminated further investment opportunities, specifically within undervalued gold stocks – for individuals seeking to diversify their portfolios and capitalize on gold's long-term potential.
Canadian-based gold production company DPMLF, with operations in two Bulgarian mines and one Namibian mine, continues to intrigue equity investors despite the steady market prices of gold that have led to stagnant growth revenues.
The company’s impressive free cash flow generation, reaching $70.5 million and $135.5 million in the second quarter and the first half of 2023, respectively, expunges concerns regarding its growth trajectories. The substantial increase in FCF primarily resulted from higher earnings realized and strategic scheduling of cash outflows towards sustaining capital expenditures.
Share performance further corroborates DPMLF's appeal. DPMLF’s shares have outperformed many gold-mining entities, having appreciated over 30% year-to-date. Despite the rally, the overall valuation remains attractive. DPMLF’s forward EV/Sales of 0.96x is 31.2% lower than the industry average of 1.40x, while its forward EV/EBITDA of 2.03x is 72.3% lower than the industry average of 7.32x.
Although DPMLF’s Return on Equity (ROE) languishes slightly below the industry average, remarkable net income growth of 115.7% and 32.2% over the past three and five years, respectively, suggests robust growth. With a payout ratio of 36%, it signals the retention of approximately 64% of its profits for reinvestment and ensuing growth.
Indeed, the significant expansion in earnings testifies to the wisdom of the company's strategy, even when considering the less-than-stellar ROE. Further supporting these prospects, recent analyst forecasts predict DPMLF’s revenue to increase by 16.1% year-over-year to $149.30 million for the fiscal third quarter ending September 2023.
