Aerospace and Defense May Be the Best Offense for Q2: 5 Top Stocks to Buy Now

By Lee Jackson Updated May 13, 12:33PM EDT · Published Apr 9, 7:54AM EDT

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Aerospace and Defense May Be the Best Offense for Q2: 5 Top Stocks to Buy Now — © Robert Sullivan / Public Domain / Flickr

One sector that has lagged over the past year has been aerospace and defense. While the COVID-19 pandemic and the ongoing 737-Max issues weighed heavily on the aerospace side of the sector, the defense side basically was ignored as fund managers started to rotate to cyclical stocks and value plays. The reality is that, in an expensive stock market like we find ourselves in now, the sector may be one of the best ideas not only for the second quarter, but for the rest of the year as well.
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In a new research report, Jefferies takes a close look at the sector. While the firm favors the aerospace side, it also have some attractive ideas in the defense world as well. The report noted this:

We favor Commercial Aerospace over Defense and IT Services. With that said, the first quarter will likely provide little in the way of incremental insight into the recovery given the last of tough comparisons. However, confidence behind the 2021 delivery skyline has modestly improved given the 737 MAX delivery cadence and the restart of 787 deliveries in late March.

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Three aerospace and two defense stocks are favored now, though one is rated Hold while the others are at Buy. It is still important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Aerospace

Raytheon Technologies Corp. (NYSE: RTX | RTX Price Prediction) stock has rallied smartly from 52-week lows but still offers perhaps the best value in the defense and aerospace sector. The company is an industry leader in defense, government electronics, space, information technology and technical services.

With a history of innovation spanning 97 years, Raytheon provides state-of-the-art electronics, mission systems integration, C5I products and services, sensing, effects and mission support for customers in more than 80 countries.

In 2019, United Technologies and Raytheon agreed to merge their businesses to create a new aerospace and defense powerhouse. The two companies received unanimous approval from their respective boards, and the merger is finally complete, with the new company now called Raytheon Technologies.

Shareholders receive a 2.45% dividend. The Jefferies price objective for stock is $90, while the Wall Street consensus target price is $85.06. Raytheon Technologies stock closed on Thursday at $77.48 per share.
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Spirit AeroSystems Holdings Inc. (NYSE: SPR) is a top aerospace and defense stock that offers solid upside potential. The company is one of the world’s largest non-OEM designers and manufacturers of aerostructures for commercial aircraft. Its core products include fuselages, pylons, nacelles and wing components.

Spirit was formed as a result of Onex Partners purchasing Boeing Wichita in June of 2005 and BAE Aerostructures in April of 2006. Spirit also provides aftermarket customer support services, including spare parts, maintenance/repair/overhaul, and fleet support services in North America, Europe and Asia. Spirit Europe produces wing components for a host of customers, including Airbus.
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The Jefferies team has a $58 price target on Spirit AeroSystems stock, while the $49.50 consensus target is much closer to Thursday’s final trade of $49.02 a share.

TransDigm Group Inc. (NYSE: TDG) stock has been on a solid roll and looks to still have sizable upside potential. This is a holding company for different businesses that provide a diverse array of products, including ignition systems, pumps, valves, motors, actuators, controls, water faucets and systems, quick disconnects and couplings, batteries, chargers and power conditioning, cockpit security systems, composites and elastomers, audio systems, and lighting and displays.

TransDigm announced in March that it signed a definitive agreement to sell its ScioTeq and Treality simulation visual systems businesses to OpenGate Capital in a deal valued at around $200 million. These businesses were acquired by the company in March 2019 as part of the Esterline Technologies takeover. They develop advanced visualization solutions primarily for the global defense, air traffic control and security end markets.

The $710 Jefferies price target compares with the $672.40 consensus estimate. The last Transdigm stock trade for Thursday was at $616.20 a share.
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Defense

CACI International Inc. (NYSE: CACI) stock could be poised for a huge second half of 2021. This information domain expertise, solutions and services provider supports national security missions and government IT modernization for intelligence, defense and federal civilian customers. It has recently increased its exposure to the products market with the acquisition of LGS Innovations and Mastodon Design.
Last year, CACI partnered with RigNet to add new capabilities to its secure mobile communications application for U.S. government agencies, via SteelBox. The company previously announced its partnership with BlackBerry to provide SteelBox, an enterprise technology that is the first secure and certified mobile communications app that enables government officials to use smartphones to text and make calls without fear of eavesdropping or data compromise.

Jefferies has a Hold rating on this stock, and the price objective is set at $260. The posted consensus target is higher at $290.75, and CACI International closed at $249.20 on Thursday.
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Northrop Grumman Corp. (NYSE: NOC) was ranked as one of the top five defense contractors by sales last year. It provides innovative systems, products and solutions in unmanned systems, cyber, C4ISR and logistics and modernization to government and commercial customers worldwide. It was also one of the companies profiting most from war.

The Aerospace Systems segment designs, develops, integrates and produces manned aircraft, unmanned systems, spacecraft, high-energy laser systems, microelectronics and other systems and subsystems.

The Information Systems segment offers advanced solutions for the Department of Defense, national intelligence and federal civilian, state, international and commercial customers. It provides products and services primarily in the fields of command and control, communications, cyber, air and missile defense, intelligence processing, civil security, health information technology, and government support systems.

The Technical Services segment provides logistics, modernization and sustainment services, as well as other advanced technology and engineering services, including space, missile defense, nuclear security, training and simulation services.

Shareholders receive a 1.74% dividend. Jefferies has set its price objective at $375. The posted consensus target price is $367.83, and Northrop Grumman stock closed trading most recently at $336.12 a share.
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The Jefferies team favors these five top aerospace and defense stocks going into the second quarter and for the rest of the year. One of the biggest obstacles for many of these parts and systems providers was the long delay on Boeing’s 737-Max and 787 deliveries. Those delays are over. The 737-Max planes are in the air again, and that alone could be a big tailwind for the sector going forward.
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About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.