Persistent supply-chain issues may impact the operating results of the aerospace-defense equipment stocks. Also, high inflation rates and jet fuel prices continue to put pressure on airlines, which, in turn, may hurt the industry players. Nevertheless, valuable acquisitions are projected to improve economies of scale for the aerospace-defense equipment stocks.
Going ahead, total airline revenues are expected to recover to around 107% of the 2019 figure, as predicted by the International Air Transport Association (IATA). This bolsters the growth prospects of aerospace-defense equipment stocks. Some key players in this industry that you may keep in your portfolio are TransDigm Group, Curtiss-Wright Corp. and AeroVironment.
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 majority 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.
4 Trends Shaping the Future of the Aerospace-Defense Equipment Industry
New M&As Instill Hopes: Rising competition has historically prompted industry majors to expand their product lines through valuable mergers and acquisitions (M&As). In November 2023, TransDigm Group agreed to acquire the Electron Device Business of Communications & Power Industries. Since Electron Device Business is a global manufacturer of electronic components and subsystems that primarily serve the aerospace and defense market, its addition should bolster TransDigm’s footprint in the aerospace and defense equipment industry.
In October 2023, Teledyne Technologies acquired Xena Networks ApS (and affiliates), a leading provider of high-speed terabit ethernet validation, quality assurance and production test solutions. This buyout will expand Teledyne LeCroy’s Protocol Test Portfolio. Moreover, BAE Systems acquired Eurostep in October to deliver advanced digital asset management to its customers. Such consolidations should improve economies of scale for the industry as a whole, with the players having access to diversified business models.
Impressive Air Traffic View Boosts Prospects: World air travel data has been on a steady growth trajectory for the past few months, driven by pent-up passenger demand. Per the latest global outlook for air transport published by IATA in December 2023, the airline industry is expected to return to profitability in 2023, only three years after the historic loss of $140 billion in 2020.
Total airline revenues are expected to recover to around 107% of the 2019 figure, with operating profits reaching $41 billion. Such projections should boost demand for aircraft parts, which, in turn, should benefit aerospace-defense equipment industry stocks, especially those engaged in commercial aviation.
Unusual Strength of the Dollar Remains a Concern: Global inflation rose to 8.7% in 2022 and is likely to pull back to 6.9% in 2023, which is still above the pre-pandemic level (as stated by the International Monetary Fund). Although this may take place at a somewhat slower pace, the price is still rising.
A stronger U.S. dollar, apart from high inflation and high jet fuel prices, puts pressure on airlines. This is because U.S. dollar-denominated costs rise for all businesses whose revenues are in another currency. An appreciated U.S. dollar value is a risk for aerospace-defense equipment stocks, particularly the ones in commercial aerospace, considering the fact that the share of jet fuel in airlines’ operating costs is considerably high, between 25% and 30%.
Supply-Chain Disruption Poses Risk: The COVID-19 pandemic has led to an unprecedented crisis in the aerospace and defense supply chain. Although aircraft deliveries in 2023 are projected to increase from the 2022 level, they are likely to remain below the 2019 level. The number of aircraft scheduled for delivery in 2023 has been lowered (as per IATA), reflecting the ongoing supply-chain issues that have resulted in production delays. This, in turn, might cause the Original Equipment Manufacturers (OEMs) 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 Gloomy Outlook
The Zacks Aerospace-Defense Equipment industry is housed within the broaderZacks Aerospace sector. It currently carries a Zacks Industry Rank #146, which places it in the bottom 42% 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 outperforms the bottom 50% by a factor of more than 2 to 1.
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 Lags S&P 500, Beats Sector
The Aerospace-Defense Equipment industry has underperformed the Zacks S&P 500 Composite but outperformed its sector over the past year. The stocks in this industry have collectively risen 15.2%, while the Aerospace sector has declined 5.4%. The Zacks S&P 500 Composite has surged 16.4% in the same time frame.
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 5.77X compared with the S&P 500’s 3.56X and the sector’s 2.20X.
Over the past five years, the industry has traded as high as 5.87X, as low as 4.90X and at the median of 5.57X.
3 Aerospace-Defense Equipment Stocks to Buy
Curtiss-Wright: Curtiss-Wright, a North-Carolina based diversified multinational company, 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.
In November 2023, the company released its third-quarter 2023 results. Its quarterly sales improved 15% year over year and new orders rose 3%, reflecting solid defense as well as commercial aerospace market demand.
The Zacks Consensus Estimate for CW’s 2023 sales implies an improvement of 9.4% from the 2022 reported figure. The Zacks Consensus Estimate for its 2023 earnings implies an improvement of 12.6% from the 2022 level. The company currently carries a Zacks Rank #2 (Buy).
TransDigm Group: Based in Cleveland, OH, TransDigm Group is a leading global designer, producer and supplier of highly engineered aerospace components used in commercial and military aircraft. In November 2023, the company released its fourth-quarter fiscal 2023 results. Its net sales improved 23% year over year, while its adjusted earnings per share surged a solid 46%.
The Zacks Consensus Estimate for TransDigm’s fiscal 2024 earnings indicates a 25.5% improvement from the previous year’s registered number. The consensus mark for TDG’s fiscal 2024 sales implies an improvement of 15.3% from the previous year’s reported figure. The company currently carries a Zacks Rank #2. You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
AeroVironment: Based in Arlington, VA, AeroVironment provides a technologically advanced portfolio of intelligent, multidomain robotic systems and related services to government agencies and businesses. Its portfolio includes unmanned aircraft systems (UAS), tactical missile systems (TMS), unmanned ground vehicles (UGV) and related services. In December 2023, the company released its second-quarter fiscal 2024 results. Its revenues rose 62% year over year and net income surged a massive 366%.
The Zacks Consensus Estimate for AVAV’s fiscal 2024 sales implies an improvement of 26.1% from the previous year’s reported figure. The consensus estimate for the company’s fiscal 2024 earnings indicates a 122.2% improvement from the previous year’s reported number. AVAV currently holds a Zacks Rank #2.
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Media Contact
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800-767-3771 ext. 9339
support@zacks.com
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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.
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Zacks Industry Outlook Highlights TransDigm Group, Curtiss-Wright and AeroVironment
For Immediate Release
Chicago, IL – December 8, 2023 – Today, Zacks Equity Research discusses TransDigm Group (TDG - Free Report) , Curtiss-Wright Corp. (CW - Free Report) and AeroVironment (AVAV - Free Report) .
Industry: Defense Equipment
Link: https://www.zacks.com/commentary/2194671/3-defense-equipment-stocks-to-buy-amid-persistent-supply-chain-woes
Persistent supply-chain issues may impact the operating results of the aerospace-defense equipment stocks. Also, high inflation rates and jet fuel prices continue to put pressure on airlines, which, in turn, may hurt the industry players. Nevertheless, valuable acquisitions are projected to improve economies of scale for the aerospace-defense equipment stocks.
Going ahead, total airline revenues are expected to recover to around 107% of the 2019 figure, as predicted by the International Air Transport Association (IATA). This bolsters the growth prospects of aerospace-defense equipment stocks. Some key players in this industry that you may keep in your portfolio are TransDigm Group, Curtiss-Wright Corp. and AeroVironment.
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 majority 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.
4 Trends Shaping the Future of the Aerospace-Defense Equipment Industry
New M&As Instill Hopes: Rising competition has historically prompted industry majors to expand their product lines through valuable mergers and acquisitions (M&As). In November 2023, TransDigm Group agreed to acquire the Electron Device Business of Communications & Power Industries. Since Electron Device Business is a global manufacturer of electronic components and subsystems that primarily serve the aerospace and defense market, its addition should bolster TransDigm’s footprint in the aerospace and defense equipment industry.
In October 2023, Teledyne Technologies acquired Xena Networks ApS (and affiliates), a leading provider of high-speed terabit ethernet validation, quality assurance and production test solutions. This buyout will expand Teledyne LeCroy’s Protocol Test Portfolio. Moreover, BAE Systems acquired Eurostep in October to deliver advanced digital asset management to its customers. Such consolidations should improve economies of scale for the industry as a whole, with the players having access to diversified business models.
Impressive Air Traffic View Boosts Prospects: World air travel data has been on a steady growth trajectory for the past few months, driven by pent-up passenger demand. Per the latest global outlook for air transport published by IATA in December 2023, the airline industry is expected to return to profitability in 2023, only three years after the historic loss of $140 billion in 2020.
Total airline revenues are expected to recover to around 107% of the 2019 figure, with operating profits reaching $41 billion. Such projections should boost demand for aircraft parts, which, in turn, should benefit aerospace-defense equipment industry stocks, especially those engaged in commercial aviation.
Unusual Strength of the Dollar Remains a Concern: Global inflation rose to 8.7% in 2022 and is likely to pull back to 6.9% in 2023, which is still above the pre-pandemic level (as stated by the International Monetary Fund). Although this may take place at a somewhat slower pace, the price is still rising.
A stronger U.S. dollar, apart from high inflation and high jet fuel prices, puts pressure on airlines. This is because U.S. dollar-denominated costs rise for all businesses whose revenues are in another currency. An appreciated U.S. dollar value is a risk for aerospace-defense equipment stocks, particularly the ones in commercial aerospace, considering the fact that the share of jet fuel in airlines’ operating costs is considerably high, between 25% and 30%.
Supply-Chain Disruption Poses Risk: The COVID-19 pandemic has led to an unprecedented crisis in the aerospace and defense supply chain. Although aircraft deliveries in 2023 are projected to increase from the 2022 level, they are likely to remain below the 2019 level. The number of aircraft scheduled for delivery in 2023 has been lowered (as per IATA), reflecting the ongoing supply-chain issues that have resulted in production delays. This, in turn, might cause the Original Equipment Manufacturers (OEMs) 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 Gloomy Outlook
The Zacks Aerospace-Defense Equipment industry is housed within the broaderZacks Aerospace sector. It currently carries a Zacks Industry Rank #146, which places it in the bottom 42% 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 outperforms the bottom 50% by a factor of more than 2 to 1.
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 Lags S&P 500, Beats Sector
The Aerospace-Defense Equipment industry has underperformed the Zacks S&P 500 Composite but outperformed its sector over the past year. The stocks in this industry have collectively risen 15.2%, while the Aerospace sector has declined 5.4%. The Zacks S&P 500 Composite has surged 16.4% in the same time frame.
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 5.77X compared with the S&P 500’s 3.56X and the sector’s 2.20X.
Over the past five years, the industry has traded as high as 5.87X, as low as 4.90X and at the median of 5.57X.
3 Aerospace-Defense Equipment Stocks to Buy
Curtiss-Wright: Curtiss-Wright, a North-Carolina based diversified multinational company, 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.
In November 2023, the company released its third-quarter 2023 results. Its quarterly sales improved 15% year over year and new orders rose 3%, reflecting solid defense as well as commercial aerospace market demand.
The Zacks Consensus Estimate for CW’s 2023 sales implies an improvement of 9.4% from the 2022 reported figure. The Zacks Consensus Estimate for its 2023 earnings implies an improvement of 12.6% from the 2022 level. The company currently carries a Zacks Rank #2 (Buy).
TransDigm Group: Based in Cleveland, OH, TransDigm Group is a leading global designer, producer and supplier of highly engineered aerospace components used in commercial and military aircraft. In November 2023, the company released its fourth-quarter fiscal 2023 results. Its net sales improved 23% year over year, while its adjusted earnings per share surged a solid 46%.
The Zacks Consensus Estimate for TransDigm’s fiscal 2024 earnings indicates a 25.5% improvement from the previous year’s registered number. The consensus mark for TDG’s fiscal 2024 sales implies an improvement of 15.3% from the previous year’s reported figure. The company currently carries a Zacks Rank #2. You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
AeroVironment: Based in Arlington, VA, AeroVironment provides a technologically advanced portfolio of intelligent, multidomain robotic systems and related services to government agencies and businesses. Its portfolio includes unmanned aircraft systems (UAS), tactical missile systems (TMS), unmanned ground vehicles (UGV) and related services. In December 2023, the company released its second-quarter fiscal 2024 results. Its revenues rose 62% year over year and net income surged a massive 366%.
The Zacks Consensus Estimate for AVAV’s fiscal 2024 sales implies an improvement of 26.1% from the previous year’s reported figure. The consensus estimate for the company’s fiscal 2024 earnings indicates a 122.2% improvement from the previous year’s reported number. AVAV currently holds a Zacks Rank #2.
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.
See Stocks Free >>
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/
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.
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
support@zacks.com
https://www.zacks.com
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.