U.S. defense stocks have been riding high ever since President Trump entered the Oval Office.
Impressively, the Zacks Aerospace sector, which includes the U.S. defense biggies, has gained 18.1% in 2019 so far compared with the S&P 500’s increase of 14.3%.
Let us now discuss in brief the growth catalysts that will continue to drive U.S. defense stocks’ rally as the year progresses.
A Solid Budget for Fiscal 2020
Trump proposed defense spending of $750 billion last month for fiscal 2020. This new plan reflects a solid 5% increase from the nation’s existing defense budget. No doubt, on approval, this budget would significantly boost the profit of U.S. defense biggies.
Notably, the proposed budget provisions $165 billion for Overseas Contingency Operations (OCO) (as reported by CNN), an account that pays for military operations overseas in places like Afghanistan, Syria and Iraq. If approved, this would mark a striking increase from the 2019 budget, which sought $69 billion for that operational account. As major U.S. defense companies continue to expand their international presence, such a significant increase in OCO provision will certainly boost their businesses across the globe.
Last year, the U.S. defense space witnessed a number of notable mergers and acquisitions like that of Northrop with Orbital ATK and United Technologies with Rockwell Collins. This is because companies are trying to enhance their portfolio to reap the benefits of expanding defense budget and survive amid cutthroat competition. Keeping up with this trend, L3 Technologies is all set to merge with Harris Corp. Such mergers should further strengthen the U.S. defense space, attracting more contracts from across the world.
Solid Q1 Earnings Picture
As of Apr 3, companies in the Zacks Aerospace sector are expected to record annual earnings growth of 4.5% on sales growth of 8.6% in Q1. Such encouraging quarterly estimates set the stage for the addition of defense stocks to one’s portfolio.
President Trump’s huge defense spending proposal and ever-growing geopolitical tensions and America’s defense resolve should lead to gains for defense stocks in 2019.
In this context, we have selected four defense stocks that are expected to gain from these factors. These four stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have outperformed the S&P 500. You can see the complete list of today’s Zacks #1 Rank stocks here.
Teledyne Technologies Inc. (TDY - Free Report)
Teledyne’s earnings estimates for 2019 indicate an annual improvement of 5.3% while that for sales show 6.7% growth. It carries a Zacks Rank #2. Shares of Teledyne have risen 17.4% this year so far.
The Boeing Company (BA - Free Report)
Boeing’s earnings estimates for 2019 indicate an annual improvement of 25.6% while that for sales shows 9.5% growth. It sports a Zacks Rank #1. Shares of Boeing have risen 19.3% this year so far.
Spirit AeroSystems Holdings, Inc. (SPR - Free Report)
Spirit AeroSystems’ earnings estimates for 2019 indicate an annual improvement of 20.8%, while that for sales shows 12.6% growth. It sports a Zacks Rank #1. Shares of Spirit AeroSystems have risen 22.2% this year so far.
Heico Corp. (HEI - Free Report)
Heico’s earnings estimates for 2019 indicate an annual improvement of 18.2% while that for sales shows 10.4% growth. It carries a Zacks Rank #2. Shares of Heico have risen 26.3% this year so far.
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