President Trump fired U.S. Secretary of State — Rex Tillerson — on Mar 13, by announcing his decision on Twitter. Consequently, stocks in the aerospace and defense space were on an upward trajectory in pre-market trading.
Notably, Northrop Grumman (NOC - Free Report) gained 0.74%, Boeing (BA - Free Report) inched up 0.31%, Lockheed Martin (LMT - Free Report) rose 0.21% and Raytheon (RTN - Free Report) was up 0.54%, per a report by The Street.
What Went Wrong With Tillerson?
Tillerson’s short tenure of a year was marked by multiple public disagreements with President Trump over diverse foreign policy decisions. In fact, the discord between these two administrative stalwarts reached to such an extent that Tillerson called Trump a “moron” in a Pentagon meeting in July 2017.
Notably, both Trump and Tillerson repeatedly clashed over multiple administrative agendas like — whether to stay in the Paris climate change accord, how to aggressively back the embargo against Qatar led by Saudi Arabia or whether to pursue a diplomatic solution to North Korea’s nuclear weapons program.
Reportedly, Tillerson also expressed displeasure regarding Trump’s widely criticized response to a neo-Nazi protest in August 2017, which had led to a death in Charlottesville, VA. Their rift emerged more sharply when Trump tweeted in October that Tillerson is "wasting his time" trying to negotiate with North Korea to end its nuclear and missile programs. Markedly, Tillerson was among Trump's deputies who tried to prevent him from taking steps to scrap the Iran nuclear deal.
These frequent discords led analysts to anticipate Tillerson’s departure in past few months. Now that the nation’s commander-in-chief has finally made the decision, the rocky tenure of America’s top diplomat have come to an end.
How Will Tillerson’s Exit Aid Defense Stocks?
Trump has suggested the name of Mike Pompeo, the CIA chief as the next secretary of state, following Tillerson’s exit.
Interestingly, Mike Pompeo is a hard-line Republican who shares Trump’s combatant perspective of the world. Moreover, Pompeo was an outspoken critic of Obama's nuclear deal with Iran and Hillary Clinton's handling of the Benghazi attack. He also criticized the former National Security Agency leaker — Edward Snowden — as a traitor and wished for his death sentence.
It is interesting to note that Trump’s presidency has already proved to be a boon for defense stocks, thanks to his optimistic defense-related strategies. On top of that, arrival of a combat-friendly diplomat like Pompeo serves as good news for the defense industry and thus has boosted the stocks post the news release.
Other Factors Boosting Defense Stocks
There’s no denying of the fact that Trump’s presidency has proved conducive to the U.S. Aerospace and Defense space, when it was grappling with the budget sequestration act implemented by the prior government. The latest fiscal 2019 defense budget proposal depicts also depicts a favorable picture for the industry. The proposal aims at spending $716 billion on national security. Of the total, $686.1 billion is being kept as funding for the Pentagon, reflecting 5% real growth over the initial fiscal 2018 President’s budget.
Apart from the budget factor, a wave of mergers has been observed between big aerospace and defense companies in a bid to fend off competition as well as expand core operations and product lines. For instance, United Technologies agreed to take over Rockwell Collins for $30 billion while Northrop Grumman is set to buy Orbital ATK for $9.2 billion. Synergies from these mega deals are sure to benefit the industry.
Additionally, emerging nations like Japan and India as well as European countries are raising their defense budgets on account of the widespread geo-political uncertainties. In this context, as the United States is the largest supplier of defense equipment, it goes without saying that a golden era awaits Aerospace & Defense stocks.
While selection of the secretary of state is a momentary event, inherent drivers like the aforementioned ones are likely to continue boosting the defense stocks.
Stocks to Buy
In order to save investors from the time-taking process of identifying key defense winners, we have created a screen using the Zacks Stock Screener.
Herein, we have zeroed in on three Aerospace & Defense stocks that have been recording better-than-expected results and a long-term earnings growth rate of 10% or more. These stocks also sport a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Moreover, these stocks have performed better than the broader market in the past year.
Boeing is a premier jet aircraft manufacturer and one of the largest defense contractors in the United States. The Zacks Rank #1 company has a long-term earnings growth rate of 13.8%. Also, it delivered an average positive earnings surprise of 20.69% in the trailing four quarters.
In a year’s time, Boeing has surged 89.5% compared with the S&P 500’s gain of 17.2%.
Spirit Aerosystems Holdings, Inc. (SPR - Free Report) is one of the largest independent non-OEM aircraft parts designers and manufacturers of commercial aerostructures in the world, in terms of annual revenues. This Zacks Rank #1 company has a long-term earnings growth rate of 10.8% and delivered an average positive earnings surprise of 9.76% in the trailing four quarters.
We note that the stock has rallied 55% in the past year compared with the S&P 500’s gain of 17.2%.
Curtiss-Wright Corporation (CW - Free Report) designs, manufactures, overhauls precision components, and provides engineered products and services to the aerospace, defense, power generation and general industrial markets. The stock has a Zacks Rank #2 and a long-term earnings growth rate of 12.4%. Additionally, it has delivered an average positive earnings surprise of 15.06% in the trailing four quarters.
We note that the stock has surged 43.3% in a year compared with the S&P 500’s gain of 17.2%.
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