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Solid industry-wide revenue per kilometer (RPK) projections for 2023, as stated by the International Air Transport Association (IATA), are expected to bode well for aerospace-defense stocks that are engaged in commercial aerospace-related operations. However, a strengthening dollar amid rising jet fuel prices remains a threat to the industry players.
Nevertheless, the outlook remains bright for the defense side of the aerospace-defense industry, buoyed by a solid budget proposal. This should keep investors interested in the industry. The frontrunners in the aerospace-defense industry are Lockheed Martin, Northrop Grumman and Leidos Holdings.
About the Industry
The Zacks Aerospace-Defense industry comprises 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 RPK increased 39.1% year over year in May 2023. IATA projects industry-wide RPKs to reach 87.8% of the 2019 level in 2023, with air traffic rising as the year progresses. 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 their 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 the U.S. fiscal 2024 defense budget request of $842 billion for the Pentagon indicates a 3.2% improvement from the previous year's enacted amount. 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 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, lingering market disequilibria will likely continue to keep prices high, including that of labor, as estimated by IATA. 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, which are already burdened with high inflation and rising jet fuel prices. The Federal Reserve's policy rate now stands at 5.25% as of May 2023, having started 2022 at 0.25%. All U.S. dollar-denominated costs are rising for airlines, which 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 commercial aerospace.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Aerospace-Defense industry is housed within the broaderZacks Aerospace sector. It currently carries a Zacks Industry Rank #182, 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 weak 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 earnings estimate for the current fiscal year has gone down 6.3% to $3.70 per share since Mar 31.
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 0.4% against the Aerospace sector's growth of 3.8%. The Zacks S&P 500 Composite has gone up 15.1% in the said time frame.
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 1.78 compared with the S&P 500's 3.56 and the sector's 2.17.
Over the past five years, the industry has traded as high as 1.99X, as low as 1.64X, and at the median of 1.88X.
3 Aerospace-Defense Stocks to Keep in Your Watchlist
Lockheed Martin: Based in Bethesda, MD, Lockheed Martin is the largest defense contractor in the world, with its main areas of focus being defense, space, intelligence, homeland security and information technology, including cyber security. On Jul 10, 2023, the company revealed that its Patriot Advanced Capability – 3 (PAC-3) Missile Segment Enhancement (MSE) interceptor has successfully communicated with the AN/SPY-1 Radar, a key component in the Aegis Weapon System. This takes LMT closer to the integration of PAC-3 MSE with Aegis weapon system, thereby strengthening demand potential for its missile defense system.
Lockheed Martin currently boasts a long-term earnings growth rate of 6.2%. The company delivered an average earnings surprise of 7.46% in the last four quarters. LMT currently carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Northrop Grumman: Based in Falls Church, VA, Northrop Grumman supplies a broad range of products and services to the U.S. Department of Defense, including electronic systems, information technology, aircraft, space technology and systems integration services. In June 2023, NOC announced that it has conducted a successful flight test of its advanced airborne navigation solution, Embedded Global Positioning System (GPS)/Inertial Navigation System (INS) Modernization, known as EGI-M. This should boost demand for NOC's products in the advanced airborne navigation system space.
The Zacks Consensus Estimate for the company's 2023 sales implies an improvement of 4.7% from the 2022 reported figure. NOC boasts a long-term earnings growth rate of 3.8%. It currently carries a Zacks Rank #3 (Hold).
Leidos Holdings: Based in Reston, VA, Leidos Holdings is a leading global science and technology company that serves the defense, intelligence, civil and health markets. On Jul 10, 2023, the company declared that it has selected Rancher Government Solutions (RGS) as an Emerging Technology Partner for the Leidos Alliance Partner Network. Leidos Holdings, along with RGS, will address the unique and strict security and operational needs of the U.S. government and military with respect to application modernization, containers and Kubernetes. This should further bolster LDOS' position in the military technology market.
The company currently boasts a long-term earnings growth rate of 7.9%. It delivered an average earnings surprise of 2.65% in the last four quarters. LDOS currently holds a Zacks Rank #3.
Why Haven't You Looked at Zacks' Top Stocks?
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Lockheed Martin, Northrop Grumman and Leidos Holdings
For Immediate Release
Chicago, IL – July 13, 2023 – Today, Zacks Equity Research discusses Lockheed Martin (LMT - Free Report) , Northrop Grumman (NOC - Free Report) and Leidos Holdings (LDOS - Free Report) .
Industry: Aerospace/Defense
Link: https://www.zacks.com/commentary/2119825/3-aerospace-defense-stocks-to-watch-amid-rising-fed-policy-rate
Solid industry-wide revenue per kilometer (RPK) projections for 2023, as stated by the International Air Transport Association (IATA), are expected to bode well for aerospace-defense stocks that are engaged in commercial aerospace-related operations. However, a strengthening dollar amid rising jet fuel prices remains a threat to the industry players.
Nevertheless, the outlook remains bright for the defense side of the aerospace-defense industry, buoyed by a solid budget proposal. This should keep investors interested in the industry. The frontrunners in the aerospace-defense industry are Lockheed Martin, Northrop Grumman and Leidos Holdings.
About the Industry
The Zacks Aerospace-Defense industry comprises 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 RPK increased 39.1% year over year in May 2023. IATA projects industry-wide RPKs to reach 87.8% of the 2019 level in 2023, with air traffic rising as the year progresses. 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 their 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 the U.S. fiscal 2024 defense budget request of $842 billion for the Pentagon indicates a 3.2% improvement from the previous year's enacted amount. 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 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, lingering market disequilibria will likely continue to keep prices high, including that of labor, as estimated by IATA. 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, which are already burdened with high inflation and rising jet fuel prices. The Federal Reserve's policy rate now stands at 5.25% as of May 2023, having started 2022 at 0.25%. All U.S. dollar-denominated costs are rising for airlines, which 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 commercial aerospace.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Aerospace-Defense industry is housed within the broaderZacks Aerospace sector. It currently carries a Zacks Industry Rank #182, 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 weak 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 earnings estimate for the current fiscal year has gone down 6.3% to $3.70 per share since Mar 31.
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 0.4% against the Aerospace sector's growth of 3.8%. The Zacks S&P 500 Composite has gone up 15.1% in the said time frame.
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 1.78 compared with the S&P 500's 3.56 and the sector's 2.17.
Over the past five years, the industry has traded as high as 1.99X, as low as 1.64X, and at the median of 1.88X.
3 Aerospace-Defense Stocks to Keep in Your Watchlist
Lockheed Martin: Based in Bethesda, MD, Lockheed Martin is the largest defense contractor in the world, with its main areas of focus being defense, space, intelligence, homeland security and information technology, including cyber security. On Jul 10, 2023, the company revealed that its Patriot Advanced Capability – 3 (PAC-3) Missile Segment Enhancement (MSE) interceptor has successfully communicated with the AN/SPY-1 Radar, a key component in the Aegis Weapon System. This takes LMT closer to the integration of PAC-3 MSE with Aegis weapon system, thereby strengthening demand potential for its missile defense system.
Lockheed Martin currently boasts a long-term earnings growth rate of 6.2%. The company delivered an average earnings surprise of 7.46% in the last four quarters. LMT currently carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Northrop Grumman: Based in Falls Church, VA, Northrop Grumman supplies a broad range of products and services to the U.S. Department of Defense, including electronic systems, information technology, aircraft, space technology and systems integration services. In June 2023, NOC announced that it has conducted a successful flight test of its advanced airborne navigation solution, Embedded Global Positioning System (GPS)/Inertial Navigation System (INS) Modernization, known as EGI-M. This should boost demand for NOC's products in the advanced airborne navigation system space.
The Zacks Consensus Estimate for the company's 2023 sales implies an improvement of 4.7% from the 2022 reported figure. NOC boasts a long-term earnings growth rate of 3.8%. It currently carries a Zacks Rank #3 (Hold).
Leidos Holdings: Based in Reston, VA, Leidos Holdings is a leading global science and technology company that serves the defense, intelligence, civil and health markets. On Jul 10, 2023, the company declared that it has selected Rancher Government Solutions (RGS) as an Emerging Technology Partner for the Leidos Alliance Partner Network. Leidos Holdings, along with RGS, will address the unique and strict security and operational needs of the U.S. government and military with respect to application modernization, containers and Kubernetes. This should further bolster LDOS' position in the military technology market.
The company currently boasts a long-term earnings growth rate of 7.9%. It delivered an average earnings surprise of 2.65% in the last four quarters. LDOS currently holds a Zacks Rank #3.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.