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5 Defense Stocks to Gain From UTX-Raytheon Merger

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Defense stocks moved higher on Jun 10 after United Technologies (UTX - Free Report) and Raytheon (RTN - Free Report) agreed to merge. The new entity is expected to generate annual sales of around $74 billion. Further, it will become the second-largest U.S. aerospace and defense company after Boeing (BA - Free Report) once the merger is completed in 2020. This is only the most-recent such agreement for a space witnessing a spate of deals.

In fact, defense stocks have emerged as power-packed performers this year. An end to budget sequestration has proven to be beneficial for the sector. With defense spending likely to remain high even if a change of guard takes place at the White House, it makes sense to add select defense stocks to your portfolio at this point.

United Technologies-Raytheon Deal Extends Spate of Mergers

Following the completion of the merger, the new entity, slated to be called Raytheon Technologies Corp will be valued at around $100 billion. This is significantly lower than the two companies’ combined market value of $166 billion, since it takes into account planned spinoffs. The deal will be completed in the first half of 2020 once United Technologies hives off its Carrier climate control and Otis elevator businesses. 

But the merger of United Technologies and Raytheon is only the latest for a sector, which has been witnessing furious M&A activity. Last year, United Technologies bought Rockwell Collins for $30 billion in its quest to become a pure-play aerospace and defense stock. Further, Northrop Grumman (NOC - Free Report) decided to acquire Orbital ATK for $9.2 billion while Harris (HRS - Free Report) and L3 (LLL - Free Report) merged in a deal valued at $33.5 billion.

Defense Among the Hottest Plays for 2019

As of Jun 10, the S&P 500 Aerospace and Defense sector was up 23% year to date, taking into account dividends reinvested. In contrast, the broader S&P 500 has gained 16% over the same period. The sector has outperformed the broader index on a dividends reinvested basis over the last five, 10 and 15 years.

The reasons for this pattern are not so mysterious. Commercial air travel is a terrific long-term bet since its growth remains robust and largely unhindered. And defense spending is likely to remain substantial regardless of who controls the Congress or White House. The sector has received a strong boost ever since the end of sequestration in 2015, a factor which had weighed on sales growth of the sector for quite some time.

In fact, President Trump has announced a substantial defense budget proposal of $750 billion for 2020. The Republican-controlled Senate is likely to approve of this proposal. And while the Democrat-heavy Senate will certainly press for a reduction, the final figure is likely to remain significantly large. The House Armed Services Committee is discussing a proposal of around $733 billion. 

Our Choices

The United Technologies-Raytheon merger is the latest entrant in the series of M&A deals the aerospace and defense sector is witnessing. Such activity is unlikely to die down soon given that defense remains an attractive space following the end of budget sequestration in 2015.

Investing in select defense stocks looks prudent at this point. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.

HEICO Corporation (HEI - Free Report) is a designer, manufacturer and seller of defense, aerospace and electronic related products and services.

HEICO Corp flaunts a Zacks Rank #1 (Strong Buy). The company’s expected earnings growth for the current year is 22.5%. The Zacks Consensus Estimate for current-year earnings has moved 3.8% north over the past 30 days.

Astronics Corporation (ATRO - Free Report) is a designer and manufacturer of aerospace, defense and electronic products.

Astronics’s expected earnings growth for the current year is 35.8%. The Zacks Consensus Estimate for current-year earnings has improved 17.1% over the past 30 days. It sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Curtiss-Wright Corporation (CW - Free Report) is a diversified multinational company that designs, manufactures and overhauls precision components.

Curtiss-Wright has a Zacks Rank #2 (Buy). The company’s expected earnings growth for the current year is 11.9%. The Zacks Consensus Estimate for current-year earnings has moved north by 3.4% over the past 30 days.

Teledyne Technologies (TDY - Free Report) is a provider of digital imaging, instrumentation, defense and aerospace electronics and engineered systems.

Teledyne has a Zacks Rank #2. The company has expected earnings growth of 6.6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 1% over the past seven days.

Wesco Aircraft Holdings, Inc. (WAIR - Free Report) and provides supply chain management services to the global aerospace industry.

Wesco Aircraft Holdings has a Zacks Rank #2. The company has expected earnings growth of 12% for the current year. The Zacks Consensus Estimate for current-year earnings has moved 3.7% north over the past 60 days.

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