A strengthening U.S. dollar, on top of the ongoing rising inflation, has been burdening airlines, hurting the prospects of aerospace-defense stocks that are more engaged in commercial aerospace-related operations. Nevertheless, increased spending by global air tourists as projected by the International Air Transport Association (IATA) in June is expected to aid commercial jet makers. Yet pandemic-induced supply-chain disruption in the U.S. defense electronics space remains a threat to stocks in the aerospace-defense space. Still, recovering air traffic trends should keep investors interested in this industry. The frontrunners in the aerospace-defense industry are
General Dynamics ( GD Quick Quote GD - Free Report) , Archer Aviation ( ACHR Quick Quote ACHR - Free Report) and Spire Global ( SPIR Quick Quote SPIR - Free Report) . About the Industry
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. 4 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% from the 2021 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. 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 stood its ground amid the COVID-19 crisis, cushioned by steady government support. 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 focused on the defense business to win more contracts, which 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. In this context, management of Boeing 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.
Strengthening Dollar Adds to industry Woes: The recently appreciating U.S. dollar is adding another layer of cost to airlines’ operations, which are already burdened with high inflation and jet fuel prices. All U.S. dollar-denominated costs are rising for airlines, which earn revenues in non-U.S. currency. Similarly, the debt burden has increased for all non-dollar-based entities that have borrowed in dollars. Such a burden on airlines might lead to lower aircraft delivery, thereby hurting aerospace-defense industry players that operate in commercial aerospace, in particular. Zacks Industry Rank Indicates Bright Prospects
The Zacks Aerospace-Defense industry is housed within the broader
Zacks Aerospace sector. It currently carries a Zacks Industry Rank #89, which places it in the top 35% 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 bright 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. 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 Beats S&P 500, Lags Sector
The Aerospace-Defense industry has outperformed the Zacks S&P 500 composite but underperformed its own sector over the past year. The stocks in this industry have collectively lost 8.2% compared with the Aerospace sector’s decline of 5.4%. In contrast, the Zacks S&P 500 composite has gone down 21.3% 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 1.96, compared with the S&P 500’s 3.18 and the sector’s 2.26.
Over the past five years, the industry has traded as high as 1.96X, as low as 1.34X, and at the median of 1.64X, as the charts show below.
EV-Sales Ratio TTM
3 Aerospace-Defense Stocks to Keep in Your Watchlist
Archer Aviation: Based in San Jose, CA, Archer Aviation is involved in designing and developing electric vertical takeoff and landing aircraft for use in urban air mobility. The company recently announced that it will launch its first electric Vertical Takeoff and Landing (eVTOL) aircraft named Midnight at an Open House event on Nov 16, 2022. With the rapidly growing demand for eVTOL aircraft in air transportation, such a product innovation should bolster ACHR’s position in the concerned market.
The Zacks Consensus Estimate for Archer Aviation’s 2022 loss implies a solid improvement from the 2021 reported figure. ACHR currently carries a Zacks Rank #2 (Buy).
Price & Consensus: ACHR Spire Global: Based in Vienna, VA, Spire Global is a provider of space-based data, analytics and space services. Earlier this month, the company won a contract from the Defense Advanced Research Projects Agency to deliver a preliminary design for a satellite that would carry an array of sensors to very low Earth orbit for in-situ ionosphere measurements. With the U.S. government emphasizing on space exploration and associated development, this contract win should position Spire Global at an advantageous place in the expanding space market. Spire Global currently boasts a long-term earnings growth rate of 7.9%. The company delivered an earnings surprise of 35.71% in the last reported quarter. SPIR currently holds a Zacks Rank #2. Price & Consensus: SPIR 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 9.3%. The company delivered an average earnings surprise of 2.42% in the last four quarters. General Dynamics currently holds a Zacks Rank #3 (Hold).
Price & Consensus: GD