It doesn’t take a genius to realize that airline traffic has slowed to a trickle, and that’s tough for pure-play aerospace stocks. However, the U.S. Department of Defense budget outlays remain very strong, and investors looking to shift assets from the heated technology sector may want to consider this sector now.
In a new report, the aerospace and defense analysts at Goldman Sachs make the case that the quarter could be very strong for some of the top stocks in the sector, and three companies are top picks going into second-quarter earnings results. While all there are rated Buy at the firm, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
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Boeing
This company has had a public relations nightmare due to the 737 Max issues. Boeing Co. (NYSE: BA | BA Price Prediction) is the world’s leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined. It is also one of the most valuable brands in the world.
The different segments in the company are Commercial Airplanes, Boeing Defense, Space & Security and Boeing Capital. The latter provides financial solutions facilitating sale and delivery of Boeing commercial and military aircraft, satellites and launch vehicles.
In 2018, Boeing and Embraer signed a nonbinding memorandum of understanding to create a new strategic partnership for commercial aviation. The new joint venture is valued at $4.75 billion, which values Boeing’s 80% share at $3.8 billion.
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The Goldman Sachs team still has Boeing as a top pick into earnings, and they noted this in the research report:
Investor expectations remain low. Second quarter free cash use is likely high, but we expect Boeing to be able to say that is the peak usage. Production rate revisions versus last update are possible, but likely minor and anticipated by investors. We expect guidance to remain suspended, but that Boeing will provide an update on key inputs including the MAX recertification timeline, customer conversations regarding orders and timing of deliveries, and liquidity. While the macro environment is still highly uncertain, we believe Boeing will be able to communicate greater visibility and confidence in all three of these key matters. Recertification test flights have begun, customers have had more time to make near and long-term fleet planning decisions, and Boeing secured $25bn of additional liquidity with the May bond issuance.
The Goldman Sachs price objective for the shares $238, and the Wall Street consensus target price is $177.80. Boeing stock closed Thursday at $178.70 a share. The company is slated to report second-quarter results on July 29.
General Dynamics
This company, like other major defense prime contractors, has had a solid year, and the balance of 2020 looks to be solid as well. General Dynamics Corp. (NYSE: GD) is engaged in business aviation, land and expeditionary combat vehicles and systems, armaments, munitions, shipbuilding and marine systems, and information systems and technologies.
Major products include Virginia-class nuclear-powered submarine and Ohio class replacement, Arleigh Burke-class Aegis, Abrams M1A2 tank, Stryker eight-wheeled assault vehicle, medium-caliber munitions and gun systems, tactical and strategic mission systems.
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The Goldman Sachs analysts are bullish on General Dynamics and noted this in the report:
We expect General Dynamics to confirm guidance for the defense businesses and indicate continued limited negative impact from COVID-19. While we see downside risk to Gulfstream revenue guidance, the company has already cut delivery guidance to 125-130 from 150 originally. We also believe deliveries in the quarter are likely better than the market fears, and if demand holds up, that guidance is achievable. Our channel checks suggest used market demand has held up, but translation to new aircraft demand is unclear, as corporate’s have pulled back but high net worth individuals may be stepping in.
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Investors receive a 2.96% dividend. Goldman Sachs has a $195 price target, while the posted consensus estimate is $169.24. The last General Dynamics stock trade on Thursday hit the tape at $148.51. Its quarterly report also is expected on July 29.
L3Harris Technologies
This recently merged company is now the sixth-largest defense firm. L3Harris Technologies Inc. (NYSE: LHX) is an agile global aerospace and defense technology innovator, which engages in the provision of defense and commercial technologies across air, land, sea, space and cyber domains. It operates through the following segments.
Its Integrated Mission Systems segment includes intelligence, surveillance and reconnaissance; advanced electro optical and infrared; and maritime power and navigation. The Space and Airborne Systems segment comprises space payloads, sensors and full-mission solutions; classified intelligence and cyber defense; avionics; and electronic warfare. Other segments include Communication Systems and Aviation Systems.
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The analysts have earnings estimates that above the current Wall Street levels. They said this in the research report:
We expect L3Harris to reiterate full-year earnings per share guidance, but indicate potential upside and that guidance is conservative. We believe the company fully de-risked guidance related to COVID-19 impact, including Aerospace down 40% for the year and a decline in Public Safety. We expect continued strength in key Defense categories such as Tactical Comms, Avionics, and Electronic Warfare. .
We do not expect COVID-19 to impact LHX’s ability to achieve synergy targets or the $3 billion 2022 free cash flow target, and management reiterated in the first quarter that it continues to see upside to the $500 million gross synergy target. We still believe the $3 billion can be achieved in 2021, and if divestitures result in that number being lower, we see proceeds deployed supporting our estimate of approximately $14/share of free cash flow in 2021.
Shareholders receive a 2.04% dividend. The $236 Goldman Sachs price target compares with the $240 consensus price objective. L3Harris Technologies stock was last seen trading at $167.03 per share. The company is expected to share its results on July 28.
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With all the companies not reporting results for almost two weeks, investors have the opportunity to scale capital in before they announce. Given the sharp run higher in the broad markets recently, this could aid in getting a better price for a total position.
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