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U.S. Aerospace Sector Sees Rampant M&As: Stocks in Focus

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Investors have been upbeat about the U.S. aerospace-defense space over the last couple of years, particularly after a wave of big mergers and acquisitions. The Aerospace sector has been especially rallying after Northrop Grumman (NOC - Free Report) announced its Orbital ATK acquisition in September 2017.

The sector has risen 28.2% since September 2017, outperforming the S&P 500’s growth of 20.2%.

Rationale Behind the Spur in Consolidation

Ever since Donald Trump has taken office as America’s Commander-in-Chief, prospects of U.S. defense contractors have been enhanced to a large extent. Here, it is imperative to mention that $718.3 billion of the proposed fiscal 2020 defense budget of $750 billion has been allotted to the Pentagon, reflecting 4.7% growth over the fiscal 2019 budget.

Budgetary expansion along with other favorable policy reforms under Trump’s leadership has turned out to be primary catalysts driving the latest spur of consolidations. The frequent mergers and acquisitions within the industry or even cross-industry are aimed at enhancing product portfolio, which will eventually help the companies clinch more contracts from the Pentagon.

Another major factor is the rise in foreign military and international sales. In the last couple of years, demand for defense products and services has risen exponentially on increasing geo-political tensions across the globe, especially in the Middle East and Eastern European nations. The recent attack by Iran on an U.S. drone is one such example. In fact, the widespread unrest has compelled developing nations like India to rapidly expand its arsenal. Defense contractors of the United States, which happens to be the largest exporter of weapons, are benefitting the most from the situation.

In the wake of the intensifying competition in the U.S. Aerospace sector, consolidations are expected to boost overall efficiency as well as bring down costs.

Key Consolidations Since 2017

Started with the acquisition of Orbital ATK by Northrop Grumman for $9.2 billion, the wave of consolidation was fueled by the takeover of government IT services company CSRA Inc. by General Dynamics (GD - Free Report) for $9.7 billion. This was followed by another major deal as United Technologies Corp. (UTX - Free Report) closed its record-breaking $30 billion acquisition of Rockwell Collins in November of that year.

The trend of mega consolidations was maintained in 2019, with defense giants Raytheon Co. (RTN - Free Report) and United Technologies Corp. announcing a merger of equals in June to create an aerospace and defense powerhouse with an estimated value of $166 billion.

Interestingly, another notable deal was completed after Harris Corporation took over L3 Technologies for $33.5 billion. Without a doubt, these merger deals are capable of leading the U.S. Aerospace sector to economies of scale.

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