Increased spending by global air tourists as projected by the International Air Transport Association (IATA) in June is expected to aid commercial jet makers. Also, the recently sanctioned National Defense Authorization Act by the U.S. House has set the stage for companies more focused on the defense business to win more contracts. However, pandemic-induced supply-chain disruption in the U.S. defense electronics space remains a threat to stocks in the aerospace-defense space. Nevertheless, recovering air traffic trends should keep investors interested in this industry. The frontrunners in the aerospace-defense industry are Northrop Grumman (NOC - Free Report) , General Dynamics (GD - Free Report) and Leidos Holdings (LDOS - Free Report) .
About the Industry
The Zacks Aerospace-Defense industry comprises companies that primarily design and manufacture heavy-built products like commercial as well as military jets and helicopters, tankers and other combat vehicles, missiles, combatant ships as well as auxiliary ships, submarines, bombs, guns, space transportation vehicles, military satellites and a few more. The industry also includes cyber security players who offer information technology (IT) services and C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions. A portion of revenues comes from defense contractors, offering spare parts, aircraft modification, ship repair and overhaul services and supply chain management services.
3 Trends Shaping the Future of the Aerospace-Defense Industry
Improved Air Traffic Outlook Boosts Prospects: Recovering global air traffic data in recent times has boosted the near-term growth prospects of the industry. As stated in a report published by the International Air Transport Association (IATA) this June, tourists traveling by air globally in 2022 are projected to spend $672 billion – a sizable increase of 78.2% over 2021’s figure. Such impressive projections bode well for commercial aerospace giants, which have long borne the brunt of poor air travel in the form of delayed jet deliveries and, in some cases, cancellation of their orders altogether by airlines. Notably, as of June 2022, airlines are scheduled to take delivery of more than 1,200 aircraft this year, reflecting almost 50% from around 800 in 2020. This should boost the top-line performance of commercial jet manufacturers and aircraft parts making companies, thereby bolstering their near-term growth prospects.
Expanding Defense Budget Remains a Growth Catalyst: While the commercial aerospace market has been recovering steadily over the past couple of quarters, the defense side of the industry has stood its ground amid the COVID-19 crisis, cushioned by steady government support. Indeed, expansionary budgetary amendments adopted by the U.S. government for defense in recent times have acted as a major catalyst for this. To this end, it is imperative to mention that the U.S. House passed the $839 billion National Defense Authorization Act, this July, thereby authorizing the U.S. government to spend $37 billion more than what President Joe Biden had requested in his budget for national security spending. Such improved budgetary provisions set the stage for industry players who are more focused on the defense business to win more contracts, which in turn should enhance their top line.
Supply Chain Issues May Hurt: Significant supply-chain disruption has been observed in the Aerospace and Defense industry, of late, courtesy of the pandemic-induced lower aircraft demand and restrictions on the movement of people and goods. This primarily affected smaller suppliers, like aircraft parts makers, especially those with heavy exposure to commercial aerospace and the aftermarket business. Although the situation is improving, the entire impact of coronavirus on the global economy and the threat of U.S. defense electronics supply-chain disruption are unlikely to subside soon. Notably, management of Boeing, a major player in this industry, stated in a Reuters report that the company expects supply chain problems to persist almost until the end of 2023, led by labor shortages at mid-tier and smaller suppliers, partly due to the faster-than-expected return of demand. This, in turn, might keep the growth trajectory of the U.S. aerospace and defense industry constricted, to some extent, in the near term.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Aerospace-Defense industry is housed within the broader Zacks Aerospace sector. It currently carries a Zacks Industry Rank #143, which places it in the bottom 43% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is due to a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have lost confidence in this group’s earnings growth potential over the past few months. Evidently, the industry’s earnings estimate for the current fiscal year has gone down 17.5% to $4.34 since Mar 31.
Before we present a few aerospace-defense stocks that you may want to add to your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Aerospace-Defense industry has underperformed the Zacks S&P 500 composite as well as its own sector over the past year. The stocks in this industry have collectively lost 36.5% compared with the Aerospace sector’s decline of 22.1%. In contrast, the Zacks S&P 500 composite has gone down 10.7% in the said timeframe.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month EV/Sales ratio, which is used for valuing capital-intensive stocks like aerospace-defense, the industry is currently trading at 1.65, compared with the S&P 500’s 3.47 and the sector’s 2.09.
Over the past five years, the industry has traded as high as 1.82X, as low as 1.34X, and at the median of 1.60X, as the charts show below.
EV-Sales Ratio TTM
3 Aerospace-Defense Stocks to Keep in Your Watchlist
Leidos Holdings: Based in Reston, VA, Leidos Holdings is a global science and technology leader that serves the defense, intelligence, civil and health markets. Its core capabilities include providing solutions in the fields of cybersecurity; data analytics; enterprise IT modernization; operations and logistics; sensors, collection and phenomenology; software development; and systems engineering. The company won a $291 million worth contract in July to support the Navy's Program Executive Office Integrated Warfare Systems Directorate. Per the terms of the agreement, Leidos will perform a range of support services, including shipboard modernization, curriculum development, training conduct, depot support, technical data, maintenance planning and management. Such contract wins should significantly boost the company’s top line.
The Zacks Consensus Estimate for Leidos Holdings’ 2022 sales implies an improvement of 3.2% from the 2021 reported figure. The company delivered an average earnings surprise of 3.22% in the last four quarters. LDOS currently carries a Zacks Rank #1 (Strong Buy).
Price & Consensus: LDOS
Northrop Grumman: Based in Falls Church, VA, Northrop Grumman is one of the top U.S. defense contractors in terms of revenues. Its product line is well positioned in high-priority categories, such as defense electronics, unmanned aircraft and missile defense. Northrop successfully completed the third captive flight test of its prototype missile development series recently. This should enhance the company’s position in the missile defense market.
Northrop Grumman currently boasts a long-term earnings growth rate of 6.1%. The company delivered an average earnings surprise of 6.7% in the last four quarters. NOC currently holds a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: NOC
General Dynamics: Based in Falls Church, VA, General Dynamics is the leading designer and builder of nuclear-powered submarines and a leader in surface combatants and auxiliary ship design and construction for the U.S. Navy. It is also a premier manufacturer and integrator of land combat solutions worldwide along with renowned business jets. The company expects G800 customer deliveries to begin in 2023 while G400 deliveries are anticipated to begin in 2025. This should bolster General Dynamics’ position in the aircraft market.
GD boasts a long-term earnings growth rate of 9.8%. The company delivered an average earnings surprise of 3.09% in the last four quarters. General Dynamics currently holds a Zacks Rank #3.
Price & Consensus: GD
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Increased spending by global air tourists as projected by the International Air Transport Association (IATA) in June is expected to aid commercial jet makers. Also, the recently sanctioned National Defense Authorization Act by the U.S. House has set the stage for companies more focused on the defense business to win more contracts. However, pandemic-induced supply-chain disruption in the U.S. defense electronics space remains a threat to stocks in the aerospace-defense space. Nevertheless, recovering air traffic trends should keep investors interested in this industry. The frontrunners in the aerospace-defense industry are Northrop Grumman (NOC - Free Report) , General Dynamics (GD - Free Report) and Leidos Holdings (LDOS - Free Report) .
About the Industry
The Zacks Aerospace-Defense industry comprises companies that primarily design and manufacture heavy-built products like commercial as well as military jets and helicopters, tankers and other combat vehicles, missiles, combatant ships as well as auxiliary ships, submarines, bombs, guns, space transportation vehicles, military satellites and a few more. The industry also includes cyber security players who offer information technology (IT) services and C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions. A portion of revenues comes from defense contractors, offering spare parts, aircraft modification, ship repair and overhaul services and supply chain management services.
3 Trends Shaping the Future of the Aerospace-Defense Industry
Improved Air Traffic Outlook Boosts Prospects: Recovering global air traffic data in recent times has boosted the near-term growth prospects of the industry. As stated in a report published by the International Air Transport Association (IATA) this June, tourists traveling by air globally in 2022 are projected to spend $672 billion – a sizable increase of 78.2% over 2021’s figure. Such impressive projections bode well for commercial aerospace giants, which have long borne the brunt of poor air travel in the form of delayed jet deliveries and, in some cases, cancellation of their orders altogether by airlines. Notably, as of June 2022, airlines are scheduled to take delivery of more than 1,200 aircraft this year, reflecting almost 50% from around 800 in 2020. This should boost the top-line performance of commercial jet manufacturers and aircraft parts making companies, thereby bolstering their near-term growth prospects.
Expanding Defense Budget Remains a Growth Catalyst: While the commercial aerospace market has been recovering steadily over the past couple of quarters, the defense side of the industry has stood its ground amid the COVID-19 crisis, cushioned by steady government support. Indeed, expansionary budgetary amendments adopted by the U.S. government for defense in recent times have acted as a major catalyst for this. To this end, it is imperative to mention that the U.S. House passed the $839 billion National Defense Authorization Act, this July, thereby authorizing the U.S. government to spend $37 billion more than what President Joe Biden had requested in his budget for national security spending. Such improved budgetary provisions set the stage for industry players who are more focused on the defense business to win more contracts, which in turn should enhance their top line.
Supply Chain Issues May Hurt: Significant supply-chain disruption has been observed in the Aerospace and Defense industry, of late, courtesy of the pandemic-induced lower aircraft demand and restrictions on the movement of people and goods. This primarily affected smaller suppliers, like aircraft parts makers, especially those with heavy exposure to commercial aerospace and the aftermarket business. Although the situation is improving, the entire impact of coronavirus on the global economy and the threat of U.S. defense electronics supply-chain disruption are unlikely to subside soon. Notably, management of Boeing, a major player in this industry, stated in a Reuters report that the company expects supply chain problems to persist almost until the end of 2023, led by labor shortages at mid-tier and smaller suppliers, partly due to the faster-than-expected return of demand. This, in turn, might keep the growth trajectory of the U.S. aerospace and defense industry constricted, to some extent, in the near term.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Aerospace-Defense industry is housed within the broader Zacks Aerospace sector. It currently carries a Zacks Industry Rank #143, which places it in the bottom 43% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is due to a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have lost confidence in this group’s earnings growth potential over the past few months. Evidently, the industry’s earnings estimate for the current fiscal year has gone down 17.5% to $4.34 since Mar 31.
Before we present a few aerospace-defense stocks that you may want to add to your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Aerospace-Defense industry has underperformed the Zacks S&P 500 composite as well as its own sector over the past year. The stocks in this industry have collectively lost 36.5% compared with the Aerospace sector’s decline of 22.1%. In contrast, the Zacks S&P 500 composite has gone down 10.7% in the said timeframe.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month EV/Sales ratio, which is used for valuing capital-intensive stocks like aerospace-defense, the industry is currently trading at 1.65, compared with the S&P 500’s 3.47 and the sector’s 2.09.
Over the past five years, the industry has traded as high as 1.82X, as low as 1.34X, and at the median of 1.60X, as the charts show below.
EV-Sales Ratio TTM
3 Aerospace-Defense Stocks to Keep in Your Watchlist
Leidos Holdings: Based in Reston, VA, Leidos Holdings is a global science and technology leader that serves the defense, intelligence, civil and health markets. Its core capabilities include providing solutions in the fields of cybersecurity; data analytics; enterprise IT modernization; operations and logistics; sensors, collection and phenomenology; software development; and systems engineering. The company won a $291 million worth contract in July to support the Navy's Program Executive Office Integrated Warfare Systems Directorate. Per the terms of the agreement, Leidos will perform a range of support services, including shipboard modernization, curriculum development, training conduct, depot support, technical data, maintenance planning and management. Such contract wins should significantly boost the company’s top line.
The Zacks Consensus Estimate for Leidos Holdings’ 2022 sales implies an improvement of 3.2% from the 2021 reported figure. The company delivered an average earnings surprise of 3.22% in the last four quarters. LDOS currently carries a Zacks Rank #1 (Strong Buy).
Price & Consensus: LDOS
Northrop Grumman: Based in Falls Church, VA, Northrop Grumman is one of the top U.S. defense contractors in terms of revenues. Its product line is well positioned in high-priority categories, such as defense electronics, unmanned aircraft and missile defense. Northrop successfully completed the third captive flight test of its prototype missile development series recently. This should enhance the company’s position in the missile defense market.
Northrop Grumman currently boasts a long-term earnings growth rate of 6.1%. The company delivered an average earnings surprise of 6.7% in the last four quarters. NOC currently holds a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: NOC
General Dynamics: Based in Falls Church, VA, General Dynamics is the leading designer and builder of nuclear-powered submarines and a leader in surface combatants and auxiliary ship design and construction for the U.S. Navy. It is also a premier manufacturer and integrator of land combat solutions worldwide along with renowned business jets. The company expects G800 customer deliveries to begin in 2023 while G400 deliveries are anticipated to begin in 2025. This should bolster General Dynamics’ position in the aircraft market.
GD boasts a long-term earnings growth rate of 9.8%. The company delivered an average earnings surprise of 3.09% in the last four quarters. General Dynamics currently holds a Zacks Rank #3.
Price & Consensus: GD
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Hurry – you can still get in early on our 10 top tickers for 2024. Hand-picked by Zacks Director of Research, Sheraz Mian, this portfolio has been stunningly and consistently successful. From inception in 2012 through November, 2023, the Zacks Top 10 Stocks gained +974.1%, nearly TRIPLING the S&P 500’s +340.1%. Sheraz has combed through 4,400 companies covered by the Zacks Rank and handpicked the best 10 to buy and hold in 2024. You can still be among the first to see these just-released stocks with enormous potential.
See New Top 10 Stocks >>
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