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3 Aerospace-Defense Stocks to Buy Buoyed by Solid Defense Budget
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Impressive projections for global air passenger traffic should bode well for aerospace-defense companies, particularly those that operate in commercial aerospace. However, consistent supply-chain issues might continue to adversely impact jet deliveries and thereby, remain a threat to the industry players. Nevertheless, the Defense Bill, worth $886 billion signed by the U.S. President in December 2023, is expected to boost aerospace-defense companies that are primarily engaged in combat space. The frontrunners in the aerospace-defense industry are Safran (SAFRY - Free Report) , Textron (TXT - Free Report) and Leidos Holdings (LDOS - Free Report) .
About the Industry
The Zacks Aerospace-Defense industry comprises of 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 services and C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions. A portion of its 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 the latest report published by the IATA, industry-wide global revenue-passenger kilometers (RPKs) increased 16.6% year over year in January 2024, thereby reaching just 0.4% below the 2019 level. Looking ahead, IATA projects 2024 air passenger revenues to grow 12% from the 2023 level to $717 billion. Such impressive projections bode well for commercial aerospace manufacturers that have long borne the brunt of poor air travel in the form of delayed jet deliveries and, in some cases, cancellation of orders 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 in December 2023, U.S. President Joe Biden signed the U.S. defense policy bill that authorizes a record $886 billion in annual military spending, thereby increasing the nation's total national security budget by about 3%. Such improved budgetary provisions set the stage for industry players focused on the defense business to win more contracts, which is likely to boost their top line.
Supply-Chain Issues May Hurt: Significant supply-chain disruption impacted the Aerospace and Defense industry, thanks to the pandemic-induced lower aircraft demand and restrictions on the movement of people and goods. This primarily affected small suppliers like aircraft part manufacturers, especially those with heavy exposure to commercial aerospace, and the aftermarket business. Although the global economy has started to improve, supply-chain issues are still expected to continue to play a part as a growth inhibitor, at least in the first half of 2024. This, in turn, might constrict the growth trajectory of the U.S. Aerospace and Defense industry, 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 that are already burdened with high inflation and rising jet fuel prices. The Federal Reserve’s policy rate was between 5.25% and 5.50% during February 2024, having started at 0.25% in 2022. All U.S. dollar-denominated costs are rising for airlines that 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 particularly operate in the commercial aerospace.
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 #62, which places it in the top 25% 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 outperform 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 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 1.5% against the Aerospace sector’s growth of 4.9%. The Zacks S&P 500 Composite has gone up 30.2% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month EV/Sales ratio, which is used for evaluating capital-intensive stocks like aerospace-defense, the industry is currently trading at 2.28 compared with the S&P 500’s 3.80 and the sector’s 2.37.
Over the past five years, the industry has traded as high as 2.38X, as low as 1.88X and at the median of 2.21X, as the charts show below.
EV-Sales Ratio TTM
3 Aerospace-Defense Stocks to Keep in Your Portfolio
Textron: Based in Providence, RI, Textron is a global multi-industry company that manufactures aircraft, automotive engine components and industrial tools. The company is known globally for its most recognizable and valuable brand names, such as Bell Helicopter, Cessna Aircraft Company, Jacobsen, Kautex, E-Z-GO and Greenlee. On Mar 13, 2024, Textron announced that it has secured a contract for supplying two of its Cessna Grand Caravan EX turboprop aircraft to the U.S. Army. Successful delivery of these jets will boost TXT’s future revenues.
The company currently boasts a long-term earnings growth rate of 10.1%. The Zacks Consensus Estimate for Textron’s 2024 sales implies an improvement of 7% from the 2023 reported figure. TXT currently sports a Zacks Rank #1 (Strong Buy).
Price & Consensus: TXT
Leidos Holdings: Based in Reston, VA, Leidos 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, and systems engineering. On Mar 7, 2024, Leidos announced that it has clinched a contract worth $158 million to develop and expand the Air Force's Command and Control Incident Management Emergency Response Application. Such contract wins boost LDOS’ backlog, thereby bolstering its revenue generation prospects.
The Zacks Consensus Estimate for the company’s 2024 sales implies an improvement of 3.5% from the 2023 reported figure. LDOS boasts a long-term earnings growth rate of 8.1%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: LDOS
Safran: Based in France, Safran produces aircraft and rocket engines and propulsion systems. On Mar 6, 2024, Safran announced that CFM International, the 50/50 joint company between Safran and General Electric, has finalized various agreements with American Airlines, Inc. to deliver LEAP-1B engines to power the airline’s Boeing 737 MAX 8 and MAX 10 fleet. On successful deliveries of these engines, Safran’s revenues should get a notable boost.
Safran currently boasts a long-term earnings growth rate of 30.2%. The Zacks Consensus Estimate for the company’s 2024 sales implies an improvement of 43% from the 2023 reported figure. SAFRY currently carries a Zacks Rank #2.
Price & Consensus: SAFRY
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3 Aerospace-Defense Stocks to Buy Buoyed by Solid Defense Budget
Impressive projections for global air passenger traffic should bode well for aerospace-defense companies, particularly those that operate in commercial aerospace. However, consistent supply-chain issues might continue to adversely impact jet deliveries and thereby, remain a threat to the industry players. Nevertheless, the Defense Bill, worth $886 billion signed by the U.S. President in December 2023, is expected to boost aerospace-defense companies that are primarily engaged in combat space. The frontrunners in the aerospace-defense industry are Safran (SAFRY - Free Report) , Textron (TXT - Free Report) and Leidos Holdings (LDOS - Free Report) .
About the Industry
The Zacks Aerospace-Defense industry comprises of 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 services and C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions. A portion of its 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 the latest report published by the IATA, industry-wide global revenue-passenger kilometers (RPKs) increased 16.6% year over year in January 2024, thereby reaching just 0.4% below the 2019 level. Looking ahead, IATA projects 2024 air passenger revenues to grow 12% from the 2023 level to $717 billion. Such impressive projections bode well for commercial aerospace manufacturers that have long borne the brunt of poor air travel in the form of delayed jet deliveries and, in some cases, cancellation of orders 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 in December 2023, U.S. President Joe Biden signed the U.S. defense policy bill that authorizes a record $886 billion in annual military spending, thereby increasing the nation's total national security budget by about 3%. Such improved budgetary provisions set the stage for industry players focused on the defense business to win more contracts, which is likely to boost their top line.
Supply-Chain Issues May Hurt: Significant supply-chain disruption impacted the Aerospace and Defense industry, thanks to the pandemic-induced lower aircraft demand and restrictions on the movement of people and goods. This primarily affected small suppliers like aircraft part manufacturers, especially those with heavy exposure to commercial aerospace, and the aftermarket business. Although the global economy has started to improve, supply-chain issues are still expected to continue to play a part as a growth inhibitor, at least in the first half of 2024. This, in turn, might constrict the growth trajectory of the U.S. Aerospace and Defense industry, 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 that are already burdened with high inflation and rising jet fuel prices. The Federal Reserve’s policy rate was between 5.25% and 5.50% during February 2024, having started at 0.25% in 2022. All U.S. dollar-denominated costs are rising for airlines that 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 particularly operate in the commercial aerospace.
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 #62, which places it in the top 25% 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 outperform 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 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 1.5% against the Aerospace sector’s growth of 4.9%. The Zacks S&P 500 Composite has gone up 30.2% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month EV/Sales ratio, which is used for evaluating capital-intensive stocks like aerospace-defense, the industry is currently trading at 2.28 compared with the S&P 500’s 3.80 and the sector’s 2.37.
Over the past five years, the industry has traded as high as 2.38X, as low as 1.88X and at the median of 2.21X, as the charts show below.
EV-Sales Ratio TTM
3 Aerospace-Defense Stocks to Keep in Your Portfolio
Textron: Based in Providence, RI, Textron is a global multi-industry company that manufactures aircraft, automotive engine components and industrial tools. The company is known globally for its most recognizable and valuable brand names, such as Bell Helicopter, Cessna Aircraft Company, Jacobsen, Kautex, E-Z-GO and Greenlee. On Mar 13, 2024, Textron announced that it has secured a contract for supplying two of its Cessna Grand Caravan EX turboprop aircraft to the U.S. Army. Successful delivery of these jets will boost TXT’s future revenues.
The company currently boasts a long-term earnings growth rate of 10.1%. The Zacks Consensus Estimate for Textron’s 2024 sales implies an improvement of 7% from the 2023 reported figure. TXT currently sports a Zacks Rank #1 (Strong Buy).
Price & Consensus: TXT
Leidos Holdings: Based in Reston, VA, Leidos 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, and systems engineering. On Mar 7, 2024, Leidos announced that it has clinched a contract worth $158 million to develop and expand the Air Force's Command and Control Incident Management Emergency Response Application. Such contract wins boost LDOS’ backlog, thereby bolstering its revenue generation prospects.
The Zacks Consensus Estimate for the company’s 2024 sales implies an improvement of 3.5% from the 2023 reported figure. LDOS boasts a long-term earnings growth rate of 8.1%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: LDOS
Safran: Based in France, Safran produces aircraft and rocket engines and propulsion systems. On Mar 6, 2024, Safran announced that CFM International, the 50/50 joint company between Safran and General Electric, has finalized various agreements with American Airlines, Inc. to deliver LEAP-1B engines to power the airline’s Boeing 737 MAX 8 and MAX 10 fleet. On successful deliveries of these engines, Safran’s revenues should get a notable boost.
Safran currently boasts a long-term earnings growth rate of 30.2%. The Zacks Consensus Estimate for the company’s 2024 sales implies an improvement of 43% from the 2023 reported figure. SAFRY currently carries a Zacks Rank #2.
Price & Consensus: SAFRY