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4 Defense Equipment Stocks to Buy Amid Supply-Chain Blues

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Valuable mergers and acquisitions are projected to improve economies of scale for the  Zacks Aerospace-Defense Equipment industry stocks, in addition to expanding and diversifying their product portfolio. However, persistent supply-chain issues plaguing commercial aerospace may dampen demand for aircraft parts, negatively impacting the bottom line and cash flow performance of the industry players.  Nevertheless, impressive projections for global air passenger traffic bolster the growth prospects of the concerned stocks. Some key players from this industry that investors may add to their portfolio are BAE Systems Plc (BAESY - Free Report) , Heico Corp. (HEI - Free Report) , Curtiss-Wright Corporation (CW - Free Report) and Leonardo DRS (DRS - 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 most 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 Hope: Rising competition has historically prompted industry majors to expand their product lines through valuable mergers and acquisitions (M&As). In October 2024, HEICO Corporation announced that its Electronic Technologies Group acquired approximately 88% of Mid Continent Controls, Inc. ("MC2"). MC2 is a niche designer and manufacturer specializing in proprietary in-cabin power and entertainment components and subsystems for business jets, with its core products including power outlets, power distribution modules, cabin management systems, multimedia connectivity ports, seat controls and switch panels.

In June 2024, Curtiss-Wright Corporation announced that it has signed an agreement to acquire the stock of Ultra Energy, a subsidiary of Ultra Electronics, for $200 million in cash. Ultra Energy is a designer and manufacturer of reactor protection systems, neutron monitoring systems, radiation monitoring systems, and temperature and pressure sensors. The acquisition is expected to be closed in the fourth quarter of 2024. Such consolidations should improve economies of scale for the industry as a whole, with the players having access to diversified business models. This, in turn, should bolster their revenue growth.

Impressive Air Traffic View Boosts Prospects: World air travel data has been on a steady growth trajectory over the past few months, driven by pent-up passenger demand. Per a report published by the International Air Transport Association (“IATA”) in June 2024, the number of global air passengers is expected to witness a solid 10.4% year-over-year improvement in 2024, whereas revenue passenger kilometers (RPKs) growth is estimated to be 11.6%. Consequently, airline industry revenues are expected to reach a historic high of $996 billion this year, reflecting an annual 9.7% improvement. Such projections bode well for aerospace-defense equipment industry stocks, especially those engaged in commercial aviation.

Supply-Chain Disruption Poses Risk: The COVID-19-pandemic-driven supply-chain issues continue to affect 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.  To this end, IATA announced in its June 2024 outlook that the number of aircraft deliveries scheduled for 2024 dropped to 1,583 (as per IATA’s June 2024 report) from 1,777 reported six months earlier, indicating 11% less capacity added, with persisting supply-chain issues playing the role of a primary growth inhibitor. Fewer jet deliveries imply lower demand for aircraft parts. This, in turn, may cause Original Equipment Manufacturers to scale down their production volume, resulting in lower earnings and cash flows for the aerospace and defense equipment industry in the near term.

Zacks Industry Rank Reflects Dim Outlook

The Zacks Aerospace-Defense Equipment industry is housed within the broader Zacks Aerospace sector. It currently carries a Zacks Industry Rank #183, which places it in the bottom 27% 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 outperform 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. The industry’s bottom-line estimate for the current fiscal year has moved down 12.7% to $2.41 since Aug. 31.

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 Beats S&P 500 & Sector

The Aerospace-Defense Equipment industry has outperformed both the Zacks S&P 500 composite and its sector over the past year.  The stocks in this industry have collectively surged 38.5% in a year, while the Aerospace sector has risen 9.7%. The Zacks S&P 500 composite has surged 31.5% 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 6.86X compared with the S&P 500’s 5.08X and the sector’s 2.49X.

Over the past five years, the industry has traded as high as7.02X, as low as 2.22X and at the median of 5.69X, as the charts show below.

EV-Sales Ratio TTM


4 Aerospace-Defense Equipment Stocks to Buy

Leonardo DRS: Based in Arlington, VA, Leonardo DRS develops and manufactures advanced defense products. The company's broad technology portfolio focuses on advanced sensing, network computing, force protection and electric power and propulsion as well as a range of key defense priorities. On Oct. 31, 2024, the company announced that it was awarded a contract from NAVSEA to produce ship-based air and surface target detection AN/SPQ-9B radars. The contract includes options, which, if exercised over five years, would bring the cumulative value to more than $235 million.

The Zacks Consensus Estimate for DRS’ 2024 sales indicates a 12.9% improvement from the previous year’s registered number. The stock boasts a long-term earnings growth rate of 18%. It currently holds a Zacks Rank #1 (Strong Buy). 

Price & Consensus: DRS

Curtiss-Wright: Based in Davidson, NC, Curtiss-Wright provides highly engineered products and services for high-performance platforms and critical applications in key areas such as commercial aerospace and defense electronics, reactor coolant pumps for next-generation nuclear reactors, as well as advanced surface treatment technologies. On Oct. 30, 2024, the company announced its third-quarter 2024 results. Its adjusted earnings per share (EPS) of $2.97 improved 16.9% from the year-ago level of $2.54. Its net sales of $798.9 million increased 10.3% year over year. 

The Zacks Consensus Estimate for CW’s 2024 sales indicates a 7.1% improvement from the previous year’s registered number. The Zacks Consensus Estimate for 2024 earnings indicates a 13.7% improvement from the previous year’s registered number. It currently holds a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price & Consensus: CW

Heico Corp.: Based in Hollywood, FL, Heico is one of the world’s leading manufacturers of FAA-approved jet engine and aircraft component replacement parts. On Nov. 4, 2024, the company announced that its Paris, France-based Exxelia subsidiary acquired 70% of SVM Private Limited ("SVM"). Exxelia is part of HEICO's Electronic Technologies Group. SVM is a leading designer and manufacturer of high-performance electronic passive components and sub-systems, including critical magnetic components and busbars, specifically serving the healthcare and industrial end-markets. 

The Zacks Consensus Estimate for fiscal 2024 sales implies an improvement of 31.1% from the previous year’s reported figure. The stock boasts a long-term earnings growth rate of 19.4%. It currently holds a Zacks Rank #2.

Price & Consensus: HEI

BAE Systems.: Based in London, United Kingdom, BAE Systems is a global company engaged in the development, delivery and support of advanced defense and aerospace systems in the air, on land and at sea. On Oct. 29, 2024, the company announced that it will invest £220 million to upgrade its facilities in Rochester, Kent. The site, which is home to the company’s UK-based Electronic Systems business, will undergo significant renovation to create a new state-of-the-art factory of more than 32,000 square meters.

The Zacks Consensus Estimate for 2024 sales implies an improvement of 37.7% from the previous year’s reported figure. The stock boasts a long-term earnings growth rate of 12.4%. It currently holds a Zacks Rank #2.

Price & Consensus: BAESY


 


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