U.S. Defense stocks have delivered moderate performance so far in 2023. While factors like encouraging defense fund support provided by governments of different nations as well as widespread unrest in the Middle East bolstered contract wins for defense contractors, supply-chain constraints induced program delivery issues and labor shortages continued to plague the industry to some extent.

Consequently, major defense market indices like the Dow Jones U.S. Select Aerospace & Defense Index and the S&P Aerospace & Defense Select Industry Index delivered positive performance but were unable to outperform the broader market (i.e., S&P 500).

Nevertheless, with the gradually declining inflation level and the Federal Reserve expected to not hike interest rates anymore, prospects for the defense stocks remain promising for days ahead. As we are on the verge of entering 2024, let’s bring the spotlight on some promising defense stocks like Archer Aviation (ACHR Quick QuoteACHR - Free Report) , AeroVironment (AVA Quick QuoteAVA - Free Report) , RollsRoyce (RYCEY Quick QuoteRYCEY - Free Report) , TransDigm Group (TDG Quick QuoteTDG - Free Report) and Triumph Group (TGI Quick QuoteTGI - Free Report) .

Before discussing these stocks’ individual viability, let’s take a closer look at the growth catalysts that are likely to drive the overall performance of the defense industry next year.

Key Catalysts to Aid Defense Stocks in 2024

With the United States being the largest arms exporter in the world, this nation’s defense budget has always been in the highlights of defense news. To this end, it is imperative to mention that on Dec 22, the U.S. President Joe Biden signed the U.S. defense policy bill that authorizes a record allowance of $886 billion in military spending. The fact that this bill has increased the nation's total national security budget by about 3% surely brings in the potential for major order inflows for prominent U.S. defense stocks.

The Defense bill also includes policies such as aid for Ukraine and push-back against China in the Indo-Pacific region. Such aids, in turn, are expected to usher in order flows for defense contractors, thereby bolstering their revenue generation prospects.

Valuable mergers and acquisitions in recent times also tend to bolster the defense industry in near future. For instance, in November 2023, TransDigm Group agreed to acquire 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 strengthen TransDigm’s footprint in the defense industry.

In October, Teledyne Technologies acquired Xena Networks ApS (and affiliates), a leading provider of high-speed terabit ethernet validation, quality assurance and production test solutions.

While such mergers are capable of improving economies of scale for the entire industry as a whole, these consolidations tend to expand and strengthen the product portfolio of the newly formed companies, thereby enhancing the chance of winning more contracts in the near future.

As of Dec 20, companies in the Zacks Aerospace sector, which houses the defense stocks, are expected to record annual earnings growth of 32.3% on sales growth of 8.2% in 2024 per our latest Earnings Outlook. Such encouraging estimates boost the growth prospects of defense stocks in 2024.

Our Top Picks

Considering the aforementioned factors, we remain confident about the defense stocks’ rally in 2024. In this context, we have selected five large-cap defense stocks that have outpaced the market in the year-to-date period. Thanks to their strong fundamentals and favorable Zacks Rank #2 (Buy), we may expect them to come up with stellar performances next year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Archer Aviation: It is involved in designing and developing electric vertical takeoff and landing (eVOTL) aircraft for use in urban air mobility. The company has been partnering with the U.S. Department of Defense (DoD) since 2021 on a series of projects through the U.S. Air Force’s AFWERX program. It does so with the goal of helping the AFWERX Agility Prime program assess the transformational potential of the vertical flight market and eVTOL technologies for DoD purposes. In third-quarter 2023, ACHR secured $142 million in U.S. Air Force contracts.   

ACHR’s shares have surged a havoc 245.4% year to date compared with the Zacks S&P 500 Composite Market’s return of 25.1%. The company is yet to generate revenues. The Zacks Consensus Estimate for the company’s 2024 revenues is pegged at $7.37 million.

AeroVironment: The company supplies unmanned aircraft systems, tactical missile systems and related services primarily to organizations within the U.S. Department of Defense.  It also supplies charging systems and services for electric vehicles, and power cycling and test systems to commercial and government customers. On Dec 12, 2023, AVAV secured an award worth $16 million from the U.S. Navy for the advancement of video analytics and computer vision research to support multi-domain robotics projects.

AVAV’s shares have surged a havoc 49.6% year to date compared with the Zacks S&P 500 Composite Market’s return. The Zacks Consensus Estimate for AVAV’s fiscal 2024 sales indicates an improvement of 30% from the fiscal 2023 estimated figure. The Zacks Consensus Estimate for AVAV’s fiscal 2024 earnings indicates an improvement of 119.1% from the fiscal 2023 estimated figure.

RollsRoyce: A provider of power systems and services for use on land, at sea and in the air, RYCEY operates in four global markets — civil aerospace, defense aerospace, marine and energy. It is a leading engine maker for the military transport market and the second largest provider of defense aero-engine products and services globally. Defense industry has 16,000 engines of RYCEY in service with 160 customers in more than 100 countries.  

RYCEY’s shares have surged a havoc 260.7% year to date compared with the Zacks S&P 500 Composite Market’s return. The Zacks Consensus Estimate for RYCEY’s 2024 sales indicates an improvement of 8.1% from the 2023 estimated figure. The Zacks Consensus Estimate for RYCEY’s 2024 earnings indicates an improvement of 33.3% from the 2023 estimated figure.

TransDigm Group: It is a leading global designer, producer and supplier of highly engineered aerospace components that are used in commercial and military aircraft. Its defense sales improved a solid 10.4% in fiscal 2023 on a year over year basis, primarily driven by improving U.S. government defense spend outlays.

Its shares have moved north 60.2% year to date compared with the Zacks S&P 500 Composite Market’s return. The Zacks Consensus Estimate for its fiscal 2024 sales implies an improvement of 15.2% from the fiscal 2023 reported figure. The consensus estimate for its fiscal 2024 earnings implies an improvement of 25.4% from the fiscal 2023 reported figure.

Triumph Group: It is capable of producing a wide range of aircraft parts including hydraulic, mechanical and electromechanical control systems, aircraft and engine accessories, structural components, auxiliary power units and avionics and aircraft instruments. In November 2023, TGI’s Actuation Products & Services business was awarded a contract from Sikorsky, a Lockheed Martin Company, for the CH-53K King Stallion rotorcraft. TRIUMPH will provide the main rotor blade fold actuation and dampening systems for lots 7 and 8 of CH-53K helicopter, including spares.

Its shares have moved north 61% year to date compared with the Zacks S&P 500 Composite Market’s return. The Zacks Consensus Estimate for its fiscal 2024 sales implies an improvement of 5.2% from the fiscal 2023 reported figure. The consensus estimate for its fiscal 2024 earnings indicates an improvement of 64.3% over the past 60 days.