Defense: Normalized FCF Yields

Research evidence excerpt

Defense: Normalized FCF Yields

Deutsche Bank

Research

North America Industry Date

United States 10 June 2026

Defense

Industrials Industry Update

Aerospace & Defense

Electronics

Normalized FCF Yields

Scott Deuschle

Bottom Line Research Analyst

This note provides our updated U.S. defense comp table. This table benchmarks +1-212-250-2014

defense valuations based on DB-adjusted FCF yields and DB-adjusted unlevered

Sam Desai, CFA

FCF yields. The primary modification for our adjusted metrics is the elimination of Research Associate

pension cash flows, which in our view should not be capitalized. +1-212-250-9761

We see that recent share price weakness has driven ~110bps of FCF yield derating

relative to late February 2026 levels (see Figure 13 here), with FCF yields now

averaging at 5.2% for large cap primes relative to 4.1% in late February. Despite this

derating, FCF multiples are not yet to the level where the names screen as cheap,

which would be closer to 6% in our view; the trading range for much of the last

decade on these normalized metrics has been between 4-6%, and current multiples

are at the midpoint of that range. While the near-medium growth outlook is clearly

better today than during much of the last decade thanks to budgets that have

already passed, its also true that the industry's competitive dynamics have become

less favorable, capital return flexibility is worse, risk free rates are higher, and the

FY27 budget pathway remains unclear.

On that last point, we note that Sen. Mitch McConnell and Sen Susan Collins

recently offered a negative view on the likelihood of defense reconciliation passing

(see here). Contradictory statements have been made by House Republicans,

which only highlights the point that the current Congress doesn't yet have a plan to