General Dynamics upgraded, Northrop and BWX downgraded at Deutsche Bank

Deutsche Bank analyst Scott Deuschle on Tuesday shifted his outlook on the U.S. defense sector, issuing a Buy rating on General Dynamics (NYSE:GD) and downgrading both Northrop Grumman (NYSE:NOC) and BWX Technologies (NYSE:BWXT) to Hold ahead of a potentially volatile Q2 earnings season.

The firm expects a “mixed bag” of results across large-cap defense, with multiple companies facing guidance risks, while others are positioned for positive revisions. Deuschle’s preference is shifting toward names with clearer earnings momentum, manageable risks, and more compelling valuations.

General Dynamics: Upgraded to Buy on superior growth

Deutsche Bank upgraded General Dynamics to Buy from Hold, citing a rare combination of sector-leading EBIT growth, improving earnings revision trends, and a relatively discounted valuation.

The firm forecasts second-quarter earnings per share 6% above consensus, driven by strong Gulfstream deliveries and federal shipbuilding momentum. Deutsche Bank also expects General Dynamics (NYSE:GD) to raise its full-year guidance, prompting a potential 1–2% positive revision to Street estimates.

Key drivers for the upgrade include:

• EBIT Growth Leadership: GD is expected to deliver a 3-year CAGR of 7.4%, ahead of Lockheed Martin’s 5.8% (ex-2024 charges) and Northrop’s 4.3%.
• Favorable Tailwinds: Stronger deliveries, supportive U.S. defense budgets, and a firming order pipeline support a constructive revision outlook.
• Compelling Valuation: GD trades at a 5.6% FCF yield on 2026 estimates, compared to 6.0% for LMT and 4.8% for NOC. On a P/E basis, GD trades at 17.6x forward earnings, a 16% discount to the S&P 500 and more attractive than its long-term average 12% discount.

Northrop Grumman: Downgraded to Hold amid premium valuation

Deutsche Bank downgraded Northrop Grumman to Hold from a previous rating of Buy, reflecting concern that the company’s premium valuation is no longer matched by a superior earnings trajectory or revision profile.

The firm estimates Q2 EPS approximately 11% above consensus, bolstered by an early gain from the training services divestiture. However, sales and EBIT are both expected to come in slightly below expectations, and Deutsche Bank believes NOC may cut its full-year sales and EBIT guidance, citing award delays, program cancellations (PTS-R, E-7), and known losses on efforts like the ESS program.

Despite the EPS beat, the report notes that guidance risk for 2025 is already widely appreciated by investors, reducing the chances of a significant downside surprise, but also limiting upside.

Additional concerns include:

• Offset Risks: While B-21 and Sentinel are long-term growth drivers, other parts of the portfolio may offset gains, undermining the premium thesis.
• Valuation Pressure: Deutsche Bank modestly raised its target FCF yield to 5.0% from 4.75%, which lowered its price target to $542 from $580, leaving just 7% upside.

The downgrade reflects a belief that better near-term opportunities exist elsewhere in the sector.

BWX Technologies: Downgraded despite nuclear hype

BWX Technologies (NYSE:BWXT) was also cut to Hold as Deuschle revised his valuation framework to more explicitly account for the long-term potential of commercial nuclear, particularly greenfield SMR and CANDU deployment. Even under optimistic assumptions, however, the stock’s current multiple (50 times 2025 free cash flow) leaves little room for upside.

The firm raised its target price to $150 (from $119), but sees the stock fairly valued. While BWXT may continue to attract flows given limited nuclear exposure across public markets, Deuschle prefers names with clearer upside.

Sector outlook: Mixed bag, with GD, RTX, CW as top picks

Deutsche Bank expects second-quarter results to be uneven across the group:

• Lockheed Martin (NYSE:LMT): Projected 20% EPS miss due to a $300 million classified Aeronautics charge.
• RTX (NYSE:RTX): Expected to beat, but may lower EPS guidance to reflect tariff impacts.
• Curtiss-Wright (NYSE:CW) and L3Harris (NYSE:LHX): Expected to beat and raise guidance.
• BWXT: Forecast to raise the low end of full-year EPS guidance.

Deuschle has Buy ratings on GD, RTX and CW, calling them the most compelling opportunities in a sector still grappling with inconsistent execution and earnings volatility.