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3 Defense Stocks Poised to Surpass Q4 Earnings Estimates

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The fourth-quarter reporting cycle for defense stocks, which are housed within the broader Zacks Aerospace sector, has already started with a handful of major defense contractors like Lockheed Martin, General Dynamics, Northrop Grumman and Textron having delivered better-than-expected earnings. Looking ahead, as geopolitical instability continues to prevail across the world, compelling nations to safeguard their borders through added defense spending, the fourth-quarter results of the remaining defense majors should also remain solid.

A handful of defense stocks like CAE Inc. (CAE - Free Report) , Leidos Holdings (LDOS - Free Report) and Triumph Group (TGI - Free Report) , which are set to release their fourth-quarter results soon, are likely to beat on earnings this reporting cycle.

Factors Driving Defense Stocks’ Growth in Q4

In a ripple effect to the rapidly growing unrest worldwide in recent times, governments of the majority of nations have been boosting their defense budget. With the United States being the world’s largest weapon manufacturer, its defense budget has always been in the spotlight. To this end, it is imperative to mention that in December 2023, U.S. President Joe Biden signed the U.S. defense policy bill that authorizes a record $886 billion in annual military spending, thereby increasing the nation's total national security budget by about 3%.

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 the defense contractors’ backlog. We expect to witness this once all the major defense players reveal their fourth-quarter numbers.

Hostile conflicts like the one currently prevailing in the Middle East, as well as the Russia-Ukraine issue, have proved to be beneficial for U.S. defense stocks. Evidently, as of Dec 27, 2023, the United States committed more than $44.9 billion in security assistance to Ukraine since the beginning of the Biden Administration (per a report by the U.S. Department of Defense). As of October 2023, the United States had 599 active Foreign Military Sales (FMS) cases, valued at $23.8 billion, with Israel (per a report by the U.S. Department of State).  No doubt these security aids imply a supply of military arms and ammunition, which, in turn, must have bolstered revenues for U.S. defense stocks in the fourth quarter.

For a handful of defense stocks like Boeing and General Dynamics, which are also critical commercial aerospace industry players, the steadily growing commercial air passenger traffic has been boosting their quarterly performance. Notably, improving air travel has prompted U.S. airlines to once again start ordering and taking deliveries of aircraft from commercial jet makers. Evidently, we could witness a 3.3% rise in Boeing’s commercial jet deliveries in the fourth quarter. Similar trends are likely to have aided fourth-quarter results for other defense stocks as well, which are yet to report.

However, some lingering factors like shortage of skilled labor, supply-chain challenges, and unfavorable inflation impacts might have had some adverse effect on the overall fourth-quarter performance of the defense stocks.

Q4 Projections

Per our latest Earnings Outlook, fourth-quarter earnings for the Aerospace sector are expected to improve 8.6% on 6.8% sales growth.

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).

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

Below we present three stocks that are expected to come up with an earnings beat this reporting cycle.

CAE is a renowned provider of simulation and modelling technologies as well as integrated training services to the defense forces around the globe. In the upcoming quarter to be reported, the company expects to continue making good progress in its Defense & Security segment by replenishing its backlog with more profitable programs. It also projects to retire low-margin legacy contracts, which, in turn, should fetch more profit for its defense business.

CAE, with an Earnings ESP of +7.73% and a Zacks Rank #3 at present, is set to release earnings on Feb 14. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for CAE’s sales is pegged at $803.4 million, indicating a 6.9% improvement from the year-ago quarter’s reported figure.

CAE Inc Price and EPS Surprise

CAE Inc Price and EPS Surprise

CAE Inc price-eps-surprise | CAE Inc Quote

Leidos’ core capabilities include providing solutions in the fields of cybersecurity; data analytics; enterprise IT modernization; operations and logistics; sensors, collection and phenomenology; software development; and systems engineering. In December 2023, the company delivered the first Enduring Shield launchers to the U.S. Army to support the latter’s Indirect Fire Protection Capability Increment 2 (IFPC Inc 2) program. This delivery must have boosted LDOS’ fourth-quarter revenues.  

LDOS, with an Earnings ESP of +1.88% and a Zacks Rank #2 at present, is set to release earnings on Feb 13. The Zacks Consensus Estimate for LDOS’s sales is pegged at $3.79 billion, indicating a 2.5% improvement from the year-ago quarter’s reported figure.

Leidos Holdings, Inc. Price and EPS Surprise

Leidos Holdings, Inc. Price and EPS Surprise

Leidos Holdings, Inc. price-eps-surprise | Leidos Holdings, Inc. Quote

Triumph Group is a manufacturer of 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. During the October-December 2023 period, the company won a handful of awards like the one for providing the main rotor blade fold actuation and dampening systems for Lockheed’s CH-53K helicopters and another for supplying next-generation, engine-mounted Electronic Control Unit (ECU) for future Auxiliary Power Unit (APU) models to Honeywell Aerospace. We may expect these awards to get duly reflected in the form of an enhanced backlog once TGI releases its fourth-quarter numbers.

TGI, with an Earnings ESP of +13.64% and a Zacks Rank #2 at present, is set to release earnings on Feb 7. The Zacks Consensus Estimate for TGI’s sales is pegged at $366.3 million, indicating 11.4% growth from the year-ago quarter’s reported figure.

Triumph Group, Inc. Price and EPS Surprise

Triumph Group, Inc. Price and EPS Surprise

Triumph Group, Inc. price-eps-surprise | Triumph Group, Inc. Quote


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