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3 Defense Equipment Stocks to Watch Amid Supply-Chain Woe

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Valuable mergers and acquisitions are projected to improve economies of scale for the aerospace-defense equipment stocks. However, persistent supply-chain issues may negatively impact the operating results of the aerospace-defense equipment stocks. Nevertheless, solid air passenger demand should benefit the industry players. Going ahead, revenue passenger kilometers (RPKs) are estimated to grow 9.8% in 2024 from the 2023 level. This, in turn, bolsters the growth prospects of aerospace-defense equipment stocks. Some key players from this industry that you may keep in your portfolio are Leonardo DRS (DRS - Free Report) , Moog (MOG.A - Free Report) and AeroVironment (AVAV - Free Report) .

About the Industry

The Zacks Aerospace-Defense Equipment industry comprises firms that manufacture various vital components for the aerospace-defense space, ranging from aerostructures, space shuttles, propulsion systems, aircraft engines, defense electronics, missile and radar systems to flight test equipment, structural adhesives, instrumentation and control systems, communication products and many more. Some of these companies also offer integrated simulation and training services to the U.S. defense force. While majority of the revenues are generated from the production of the aforementioned accompaniments, the industry players also generate revenues by providing notable aftermarket support and services like maintenance, repair and overhaul activities to aerospace and defense players.

3 Trends Shaping the Future of the Aerospace-Defense Equipment Industry

New M&As Instill Hopes: Rising competition has historically prompted industry majors to expand their product lines through valuable mergers and acquisitions (M&As). In February 2024, BAE Systems completed its acquisition of Ball Aerospace for $5.55 billion. This transaction must have offered BAE Systems a robust platform for accelerating its space strategy, apart from enhancing its product portfolio with other critical defense components. Earlier in December 2023, AAR Corp. signed an agreement to purchase Triumph Group’s product support business for cash worth $725 million. This business, being a leading provider of maintenance, repair and operations (MRO) services for critical aircraft components in the commercial and defense markets, should strengthen AAR Corp.’s footprint in the global aviation market.  Such consolidations should improve economies of scale for the industry as a whole, with the players having access to diversified business models.

Impressive Air Traffic View Boosts Prospects: World air travel data has been on a steady growth trajectory for the past few months, driven by pent-up passenger demand. Per a report published by IATA in December 2023, the air passenger revenues are expected to witness a solid 12% year-over-year improvement in 2024, whereas revenue passenger kilometers (RPKs) growth is estimated to be 9.8% during the same period. Consequently, airline industry revenues are expected to reach a historic high of $964 billion in 2024. Such projections should substantially boost demand for aircraft parts, which, in turn, should benefit aerospace-defense equipment industry stocks, especially those engaged in commercial aviation.

Supply-Chain Disruption Poses Risk: The COVID-19 pandemic has led to an unprecedented crisis in the aerospace and defense supply chain. Such supply-chain issues continue to impact global trades and businesses. Airlines have been directly affected by unforeseen maintenance issues on some aircraft/engine types as well as delays in the delivery of aircraft parts and aircraft, thereby limiting capacity expansion and fleet renewal. According to some industry experts, although headwinds like the shortage of aircraft parts and delivery delays are easing of late, it might take up to two years for the entire challenge to settle down. Therefore, the long going supply-chain bottleneck is here to stay for the time being, which, in turn, might cause the Original Equipment Manufacturers (OEMs) to scale down their production volume. This might result in lower earnings and cash flows for the aerospace and defense equipment industry in the near term.

Zacks Industry Rank Reflects Bleak Outlook

The Zacks Aerospace-Defense Equipment industry is housed within the broader Zacks Aerospace sector. It currently carries a Zacks Industry Rank #149, which places it in the bottom 40% 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 gloomy 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 equipment 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, Beats Sector

The Aerospace-Defense Equipment industry has underperformed the Zacks S&P 500 Composite but outperformed its sector over the past year. The stocks in this industry have collectively risen 27.3% in the same time frame, while the Aerospace sector has declined 1.7%. The Zacks S&P 500 Composite has surged 28% in the same time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of trailing 12-month EV/Sales, which is used for valuing capital-intensive stocks like aerospace-defense equipment, the industry is currently trading at 6.42X compared with the S&P 500’s 3.84X and the sector’s 2.26X.

Over the past five years, the industry has traded as high as 6.46X, as low as 5.15X and at the median of 5.66X, as the charts show below.

EV-Sales Ratio TTM

3 Aerospace-Defense Equipment Stocks to Watch

Leonardo DRS: Based in Arlington, VA, Leonardo DRS develops and manufactures advanced defense products for the U.S. military, intelligence agencies and allies. On Feb 27, 2024, the company announced fourth-quarter and full-year 2023 results. Leonardo DRS reported revenues of $926 million in the fourth quarter, up 13% year over year.

The stock holds a solid long-term earnings growth rate of 8.5%. It delivered an earnings surprise of 3.3% in the last reported quarter. The company currently carries a Zacks Rank #2 (Buy).

Price & Consensus: DRS


Moog: Based in Elma, NY, Moog is a designer, manufacturer, and integrator of precision motion control products and solutions. On Jan 25, 2024, the company announced its first-quarter fiscal 2024 results. Its net sales worth $857 million improved 13% year over year. Adjusted earnings per share also improved a solid 22%.  

The Zacks Consensus Estimate for Moog’s fiscal 2024 earnings indicates a 12.9% improvement from the previous year’s registered number. The consensus mark for fiscal 2024 sales implies an improvement of 6% from the previous year’s reported figure. The company currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price & Consensus: MOG.A


AeroVironment: Based in Arlington, VA, AeroVironment provides a technologically advanced portfolio of intelligent, multidomain robotic systems and related services to government agencies and businesses. Its portfolio includes unmanned aircraft systems (UAS), tactical missile systems (TMS), unmanned ground vehicles (UGV) and related services. On Jan 9, 2024, AeroVironment announced the first successful multi-drop, live fire GPS-guided Shryke munitions from VAPOR 55 MX, an all-electric unmanned aircraft system, in collaboration with Corvid and L3Harris Technologies. This should strengthen AVAV’s position in the unmanned aircraft systems market.

The Zacks Consensus Estimate for AVAV’s fiscal 2024 sales implies an improvement of 30% from the previous year’s reported figure. The consensus estimate for the company’s fiscal 2024 earnings indicates a 119.1% improvement from the previous year’s reported number. AVAV currently holds a Zacks Rank #3 (Hold).

Price & Consensus: AVAV


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