The Q2 reporting cycle for defense stocks, which are housed within the broader
Aerospace sector, has already started with Lockheed Martin ( LMT Quick Quote LMT - Free Report) delivering better-than-expected results. Taking a look at the whole picture, we remain optimistic about the defense majors’ performance this earnings season. Factors Driving Q2 Defense Growth
Expansionary budgetary amendment for defense has always acted as a major catalyst for defense stocks’ gains. Notably, U.S. President Biden submitted his first budget request in detail to Congress on May 28, which included an investment option worth $715 billion for the Department of Defense (DoD). This marked a 1.6% increase from the prior year’s enacted amount of $703.7 billion.
Such enhanced budgetary provisions thereby raised the chance of increased order inflows for major defense primes from Pentagon and U.S. allies. This in turn must have boosted backlog of the defense contractors, which we expect to witness once all the major defense players reveal their Q2 numbers.
Frequent cross-border conflicts are also a growth driver for the defense industry and Q2 was no exception. In the months of April and May, the world witnessed a series of hostile conflicts between Israel and Palestine with frequent rocket and missile exchanges between the two nations. Such conflicts boost the growth trajectory of U.S. defense stocks, with America being a long-time patronizer of Israel. In April, the U.S. administration told Congress that it is proceeding with more than $23 billion in weapons sales to the United Arab Emirates, which contained products from Lockheed and
Raytheon Technologies ( RTX Quick Quote RTX - Free Report) .
The commercial aerospace industry, which also forms part of the Aerospace sector, witnessed a gradual recovery in global air traffic that must have been a relief for companies like
Boeing ( BA Quick Quote BA - Free Report) . Per the latest report by International Air Transport Association, initial Q2 financial results indicate an ongoing improvement in North America, with major U.S. carriers reporting positive free cash flow for the first time since the crisis started. This in turn prompted U.S. airlines to once again start ordering and taking deliveries of aircraft from commercial jet makers, which should get reflected in Q2 results.
However, factors like supply chain disruption across the board, courtesy of the lingering pandemic impacts, along with dearth of ample cash flow within the industry compared to pre-COVID era might get reflected in the Q2 numbers of some of the companies.
Per the latest
Earnings Preview, second-quarter earnings for the Aerospace sector are expected to improve 153% on 13% sales increase. Zacks Methodology
Given the high degree of diversity in the defense space, finding the right stocks with the potential to beat estimates might be quite a daunting task.
However, our proprietary Zacks methodology makes it fairly simple.
We are focusing on stocks that have the combination of a positive
Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see . the complete list of today’s Zacks #1 Rank stocks here
Our research shows that for stocks with this combination, chances of an earnings surprise are as high as 70%.
Earnings ESP provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our
Earnings ESP Filter. Our Choices
Here we present four stocks that are expected to beat earnings estimates in this reporting cycle.
General Dynamics ( GD Quick Quote GD - Free Report) is a renowned military shipbuilders, which also holds a prominent position in land and expeditionary combat vehicles, armaments and munitions as well as jet aviation markets. Its G700 aircraft is currently on track to enter into service next year. The company, with an Earnings ESP of +1.96% and a Zacks Rank #3 is set to release earnings on Jul 28.
The company beat the Zacks Consensus Estimate in the trailing four quarters, delivering an earnings surprise of 2.32%, on average.
Another company likely to come up with an earnings beat this time around is
Northrop Grumman ( NOC Quick Quote NOC - Free Report) , which supplies a broad array of products and services to the U.S. Department of Defense (DoD) including electronic systems, information technology, aircraft, space technology and systems integration services. Its product line is well positioned in high priority categories, such as defense electronics, unmanned aircraft and missile defense. It has a Zacks Rank #2 and an Earnings ESP of +0.97%. It is scheduled to release earnings on Jul 29.
Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate on each occasion, the surprise being 13.20%, on average.
Leidos Holdings ( LDOS Quick Quote LDOS - Free Report) is another noteworthy defense contractor, which offers surveillance and reconnaissance, integrated systems solutions and global services to the U.S. Intelligence Community, military commands as well as other government and commercial customers. In May, Leidos Holdings completed the acquisition of Gibbs & Cox for approximately $380 million in cash, the benefits of which should get reflected in the upcoming results. It has a Zacks Rank #2 and an Earnings ESP of +4.46%. It is scheduled to release earnings on Aug 3.
Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate on each occasion, the surprise being 20.11%, on average.
Yet another prominent defense major is
L3Harris Technologies ( LHX Quick Quote LHX - Free Report) , which supplies advanced defense technologies across air, land, sea, space and cyber domains. In an attempt to become a global leader in electronic warfare and aircraft survivability, the company has been lately leveraging its experience in providing F-16 systems and its expertise in software-defined open systems architecture. It has a Zacks Rank #3 and an Earnings ESP of +0.43%. It is scheduled to release earnings on Aug 3.
Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate on each occasion, the surprise being 5.90%, on average.