The blood and sacrifice of the U.S. military force over the years has made the nation a military superpower. However, while we pay homage to our heroes on the occasion of Memorial Day, we should also respect the contribution of the U.S. Aerospace and Defense industry to the economy.
We dig deeper into the industry and highlight why some top picks could not earn you smart gains ahead.
Investors should note that with geopolitical uncertainty on the rise, developed as well as emerging nations have been increasing their defense spending. A stressed relationship between the United States and North Korea has long been a hot affair.
On Thursday, the White House called off the planned Jun 12 meeting in Singapore due to North Korea’s “tremendous anger and open hostility” targeted toward Washington. Though in response to the cancellation of the meeting, Kim Jong Un made comments in a peacemaking tone, sensing a possible warfare, defense stocks went northward.
Added to this, the Iran deal was suspended a few days back. There is tension related to the civil war in Syria. All these have given a boost to defense stocks (read: Defense Stocks Rally on Iran Deal: 4 Hot Picks).
Trump’s victory in the U.S. Presidential election in Nov 2016 provided a boost to the defense sector due to his proposals for a massive increase in defense spending. He is expected to boost U.S. military spending considerably. Plus, the intrinsic strength of the stocks in this space is worthy of mention.
Greater Mergers and Acquisitions
The Aerospace and Defense sector is thriving with mergers and acquisitions. An analysis by Capstone Headwaters revealed that the amount of activities within the aerospace and defense world rose 2% in 2017 compared with a 16% decline the prior year. Among the hot deals, there was a $30-billion deal between United Technologies and the avionics and interiors maker Rockwell Collins. Boeing also announced its acquisition of advanced aerospace and autonomous systems manufacturer Aurora Flight Sciences in October 2017.
Aerospace, which accounts for a meager 1.7% of the S&P 500 index, came up with impressive beat ratios in the Q1 reporting cycle. All companies have reported earnings in this season, with 90.9% companies beating earnings estimates while 81.8% surpassing the top line.
The space posted a 37.8% surge in earnings in Q1 on 7.8% revenue growth. The scenario should be steady in Q2 with a likely earnings growth rate of 17.6% on 4.2% revenue growth, as per the Earnings Trends issued on May 23, 2018.
Strong Sector Fundamentals
Growing civilian demand thanks to an improving global economy, aging commercial aircraft and the consequent rise in aircraft orders, a pickup in defense spending in certain other countries including Brazil, India and Saudi Arabia plus technological innovation and acquisitions have brightened the appeal for the sector.
Stocks to Play
Against this backdrop, below we highlight a few top-ranked defense stocks that could fatten your portfolio.
Wesco Aircraft Holdings Inc. (WAIR - Free Report)
The Zacks Rank #2 (Buy) company distributes and provides supply chain management services to the global aerospace industry. It comes from a top-ranked Zacks sector (top 50%). The stock gained about 2.7% on May 24.
AeroVironment Inc. (AVAV - Free Report)
The Zacks Rank #1 (Strong Buy) company designs, develops, produces, operates a portfolio of products and services for government agencies, businesses and consumers. It belongs to a top-ranked Zacks industry (top 43%). The stock gained about 2.5% on May 24. You can see the complete list of today’s Zacks #1 Rank stocks here.
Kratos Defense & Security Solutions Inc. (KTOS - Free Report)
The Zacks Rank #1 company is a specialized National Security Technology business providing mission critical products, services and solutions for United States National Security priorities. The company hails from a top-ranked Zacks industry (top 43%). The stock gained about 1.2% on May 24.
Transdigm Group Inc. (TDG - Free Report)
The Zacks Rank #2 company is a leading global producer and supplier of highly engineered aircraft components for use on nearly all commercial and military aircraft in service. The company belongs to a top-ranked Zacks industry (top 43%). The stock gained about 0.5% on May 24.
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