Group 1: Company Ratings Adjustments - Deutsche Bank analyst Scott Doyshler adjusted ratings for three defense companies ahead of Q2 earnings season, upgrading General Dynamics (GD.US) from "Hold" to "Buy" and downgrading Northrop Grumman (NOC.US) and BWX Technologies (BWXT.US) to "Hold" [1] - The firm anticipates a mixed performance among large defense stocks in Q2, with some companies facing earnings guidance risks while others may see positive revisions [1] Group 2: General Dynamics (GD.US) - Deutsche Bank highlighted three core advantages supporting the upgrade for General Dynamics: leading EBIT growth in the industry with a projected 7.4% CAGR over the next three years, strong Gulfstream business jet deliveries, and a favorable federal shipbuilding outlook [2] - The company’s free cash flow yield is projected at 5.6% for 2026, higher than Northrop Grumman's 4.8%, and its P/E ratio of 17.6x shows a 16% discount to the S&P 500, indicating attractive valuation [2] - Q2 EPS for General Dynamics is expected to exceed market consensus by 6%, potentially leading to an upward revision of full-year guidance [2] Group 3: Northrop Grumman (NOC.US) - Despite an expected 11% beat in Q2 EPS due to the divestiture of training business, sales and EBIT are likely to fall short of market expectations [3] - Concerns over high valuation relative to earnings growth trajectory, along with risks from project delays and cancellations, prompted a downgrade to "Hold" [3] - The target price was reduced from $580 to $542, reflecting a slight adjustment in free cash flow yield from 4.75% to 5% [3] Group 4: BWX Technologies (BWXT.US) - BWX Technologies benefits from the nuclear energy sector's momentum, but Deutsche Bank downgraded its rating to "Hold" based on a more rigorous valuation framework [4] - Even under optimistic assumptions, a 50x P/E based on 2025 free cash flow reflects long-term potential adequately, with the target price raised from $119 to $150, indicating limited undervaluation at current levels [4] Group 5: Industry Outlook - The defense sector is expected to experience structural performance differentiation in Q2, with Lockheed Martin (LMT.US) potentially facing a 20% EPS decline due to $300 million in classified aviation expenses [5] - RTX (RTX.US) may exceed expectations but will need to lower guidance to account for tariff impacts, while Curtiss-Wright (CW.US) and L3Harris (LHX.US) are likely to outperform and raise guidance [5] - General Dynamics, RTX, and Curtiss-Wright are identified as preferred buy candidates due to their earnings resilience and valuation alignment, although the overall defense sector faces challenges related to execution stability and earnings volatility [5]