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The Russian onslaught in Ukraine may have caused untold destruction and loss of life. It may have roiled the commodities markets and may have exacerbated inflation across a world that was already struggling to recover from the worst pandemic in years.
But all sectors weren’t hammered. Of the few that continued to beat the market was the Zacks Aerospace market, comprising mainly the Aerospace - Defense and Aerospace - Defense Equipment industries.
One-Year Price Performance
Image Source: Zacks Investment Research
The sector usually does well in times of economic downturns because most of its business comes from long-term government contracts. While these contracts may be harder-fought and take longer to get to the fulfillment stage, once there, they usually generate very stable cash flows for long periods of time. Therefore, even if markets don’t do well at all and the economy enters a recession, their revenues aren’t interrupted. Conversely, when markets do well, and other sectors see surging revenues and profits, the defense sector doesn’t. Therefore, it isn’t attractive at such times.
Another reason for the attractiveness of this sector is that its main customer is the government. The government doesn’t default on payments. Nor does it cancel programs because it has run into financial trouble. It never goes bankrupt. You get the picture.
So today, having already provided $32.5 billion in military aid to Ukraine since the start of the war in Feb 2022, the U.S. is only slightly short of its commitment of $33.2 billion. That means there may not be a lot of additional aid, especially considering the state of the economy. Therefore with this windfall ending, the question arises whether the sector remains attractive.
I say it does, for the other reasons mentioned above, especially in the backdrop of an economy that continues to see job cuts and inflation/rate hikes. Additionally, Biden’s recently proposed budget for Department of Defense (DoD) discretionary spending calls for a 3.2% increase from 2023 to $842 billion in 2024. This too is a good sign.
Northrop Grumman is a government contractor supplying a broad array of products and services, including electronic systems, information technology, aircraft, space technology and systems integration services to the U.S. (DoD).
Current programs like the F-35, Triton and SABR radar Global Hawk are positive for Northrop, and recent budgetary provisions ensure continued strength in demand. However, because of inflation and supply chain constraints (something that affects all the players), it is not expected to return to profitability until next year.
The 2023 earnings estimate has increased 30 cents (1.4%) and the 2024 estimate 9 cents (less than a percentage point) in the last 60 days.
The shares carry a Zacks #2 (Buy) rank and a B each for value, Growth and Momentum, meaning that they’re a reasonable add for all kinds of investors.
Embraer is not just a defense stock, it generates over 30% of sales from commercial aircraft and another nearly 30% from executive jet sales and aircraft leasing. The defense and security business makes up less than 15% of revenue.
Therefore, the company’s fortunes are hugely connected with the airline industry and the rebounding air traffic that we’re seeing today. Passenger traffic is returning because of increased confidence about traveling after COVID while goods freight is benefiting from a robust ecommerce market.
Analysts expect the company to grow revenues 17.4% this year with earnings increasing 433.3%. Earnings growth will slow to 33.6% in 2024 on the back of revenue that will grow 13.7%. Recent estimate revisions reflect analyst sentiment. The 2023 earnings estimate is up 25 cents (28.7%) while the 2024 estimate is up 16 cents (12.0%) in the last 60 days.
The Zacks #2 rank and A score for Value and Growth indicate that these are shares investors shouldn’t pass up in the current environment.
NOC and ERJ Over the Past Month
Image Source: Zacks Investment Research
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Is It Still Good Days for Defense Stocks?
The Russian onslaught in Ukraine may have caused untold destruction and loss of life. It may have roiled the commodities markets and may have exacerbated inflation across a world that was already struggling to recover from the worst pandemic in years.
But all sectors weren’t hammered. Of the few that continued to beat the market was the Zacks Aerospace market, comprising mainly the Aerospace - Defense and Aerospace - Defense Equipment industries.
One-Year Price Performance
Image Source: Zacks Investment Research
The sector usually does well in times of economic downturns because most of its business comes from long-term government contracts. While these contracts may be harder-fought and take longer to get to the fulfillment stage, once there, they usually generate very stable cash flows for long periods of time. Therefore, even if markets don’t do well at all and the economy enters a recession, their revenues aren’t interrupted. Conversely, when markets do well, and other sectors see surging revenues and profits, the defense sector doesn’t. Therefore, it isn’t attractive at such times.
Another reason for the attractiveness of this sector is that its main customer is the government. The government doesn’t default on payments. Nor does it cancel programs because it has run into financial trouble. It never goes bankrupt. You get the picture.
So today, having already provided $32.5 billion in military aid to Ukraine since the start of the war in Feb 2022, the U.S. is only slightly short of its commitment of $33.2 billion. That means there may not be a lot of additional aid, especially considering the state of the economy. Therefore with this windfall ending, the question arises whether the sector remains attractive.
I say it does, for the other reasons mentioned above, especially in the backdrop of an economy that continues to see job cuts and inflation/rate hikes. Additionally, Biden’s recently proposed budget for Department of Defense (DoD) discretionary spending calls for a 3.2% increase from 2023 to $842 billion in 2024. This too is a good sign.
So now, let’s take a look at some stocks-
Northrop Grumman Corporation (NOC - Free Report)
Northrop Grumman is a government contractor supplying a broad array of products and services, including electronic systems, information technology, aircraft, space technology and systems integration services to the U.S. (DoD).
Current programs like the F-35, Triton and SABR radar Global Hawk are positive for Northrop, and recent budgetary provisions ensure continued strength in demand. However, because of inflation and supply chain constraints (something that affects all the players), it is not expected to return to profitability until next year.
The 2023 earnings estimate has increased 30 cents (1.4%) and the 2024 estimate 9 cents (less than a percentage point) in the last 60 days.
The shares carry a Zacks #2 (Buy) rank and a B each for value, Growth and Momentum, meaning that they’re a reasonable add for all kinds of investors.
Embraer S.A. (ERJ - Free Report)
Embraer is not just a defense stock, it generates over 30% of sales from commercial aircraft and another nearly 30% from executive jet sales and aircraft leasing. The defense and security business makes up less than 15% of revenue.
Therefore, the company’s fortunes are hugely connected with the airline industry and the rebounding air traffic that we’re seeing today. Passenger traffic is returning because of increased confidence about traveling after COVID while goods freight is benefiting from a robust ecommerce market.
Analysts expect the company to grow revenues 17.4% this year with earnings increasing 433.3%. Earnings growth will slow to 33.6% in 2024 on the back of revenue that will grow 13.7%. Recent estimate revisions reflect analyst sentiment. The 2023 earnings estimate is up 25 cents (28.7%) while the 2024 estimate is up 16 cents (12.0%) in the last 60 days.
The Zacks #2 rank and A score for Value and Growth indicate that these are shares investors shouldn’t pass up in the current environment.
NOC and ERJ Over the Past Month
Image Source: Zacks Investment Research