No matter what period in history you look at, there is almost always some sort of global conflict. While nobody wants to see protracted and deadly wars, the reality is that most major countries have adopted a peace through strength posture. For investors looking for sectors to shift to as the aging bull market slows, it always makes sense to have positions in the defense and aerospace arena.
A new research report from the defense and aerospace team at Truist Securities makes a solid case that the sector could outperform the rest of 2021 and into next year. The analysts previewed several top companies, and we screened the research looking for the large-capitalization leaders that were rated Buy. Four industry leaders look like solid picks for long-term growth investors.
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The analysts are positive on the U.S. Department of Defense budget for 2022 and noted this:
Our initial examination of the budget appears favorable. We believe the shift away from the procurement of legacy platforms in support of new R&D programs will potentially create margin headwinds for some contractors, but in aggregate we believe fears of large-scale Blue Wave defense spending cuts look to have been overblown considering the proposed 2% CAGR through 2026. Moreover, we expect that favorable spending trends in support of space, cyber, microelectronics, hypersonics, and next-gen unmanned systems should provide tailwinds for our defense coverage universe.
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While all four stocks are rated Buy at Truist Securities, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
BWX Technologies
This under-the-radar stock has solid upside potential. BWX Technologies Inc. (NYSE: BWXT) manufactures and sells nuclear components in the United States, Canada and internationally. Its Nuclear Operations Group segment offers nuclear components, reactors, assemblies and fuel for the U.S. Department of Energy National Nuclear Security Administration’s Naval Nuclear Propulsion Program and other uses. It also offers close-tolerance equipment for nuclear applications; research reactor fuel elements for colleges, universities and national laboratories; and components for defense applications.
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BWX Technologies provides missile launch tubes for the United States Navy submarines; converts Cold War-era government stockpiles of high-enriched uranium; and receives, stores, characterizes, dissolves, recovers and purifies uranium-bearing materials. Its Nuclear Services Group segment provides nuclear materials processing, environmental site restoration and management and operating services for the United States government-owned facilities. It develops technology for advanced nuclear power sources application; designs, engineers, licenses and manufactures advance nuclear reactors; and inspects and services steam generators, heat exchangers, reactors, fuel handling systems and balance of plants. And it provides non-destructive examination and tooling/repair solutions and nuclear fuel.
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Its Nuclear Power Group segment offers commercial nuclear steam generators, heat exchangers, pressure vessels, reactor components and containers; nuclear fuel, fuel handling systems, tooling delivery systems and related services, as well as engineering and in-plant services for nuclear power plants; and medical radioisotopes and radiopharmaceuticals. It also designs, manufactures, commissions and services nuclear power generation equipment.
Shareholders receive a 1.33% dividend. Truist Securities has a $77 price target on the shares, while the Wall Street consensus target is $74.13. Wednesday’s closing print was $63.25 per share.
L3 Harris Technologies
Two companies merged in 2019 and are now the sixth-largest defense company. L3 Harris Technologies Inc. (NYSE: LHX | LHX Price Prediction) is an agile global aerospace and defense technology innovator engaged in the provision of defense and commercial technologies across air, land, sea, space and cyber domains.
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.
Top Wall Street analysts have felt for some time that the company is situated well in the high growth buckets of the Defense Department budget, and many believe the business is not as short-cycle as the market historically has perceived. Merger synergies give the business a unique path to cash flow and margin upside, along with above-average revenue growth.
Shareholders receive a 1.78% dividend. The Truist Securities price target is $258, and the consensus figure is $240. L3 Harris Technologies stock closed on Wednesday at $218.72 a share.
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Maxar Technologies
Investors may not be as familiar with this company either, but its stock has solid upside potential. Maxar Technologies Inc. (NASDAQ: MAXR) provides earth intelligence and space infrastructure solutions in the United States and internationally.
Its Earth Intelligence segment offers earth imagery products, including orthorectified imagery, imagery basemap, 3D and elevation and information products. SecureWatch is a subscription offering that provides online access to imagery and geospatial intelligence platforms. This segment also offers geospatial information, application and analytic services. It serves U.S. and other international government agencies, such as defense and intelligence agencies, as well as commercial customers in various markets.
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The Space Infrastructure segment provides space-based infrastructure, robotics, subsystems and information solutions, including communication and imaging satellites and payloads; platforms for space exploration and hosting instruments for earth science; space subsystems for power, propulsion and communication; satellite ground systems and support services; space-based remote sensory solutions; space robotics; and defense systems. This segment serves government agencies and satellite operators.
Shareholders receive just a 0.12% dividend. The $59 Truist Securities price target compares with a $60.52 consensus target. Wednesday’s closing share price was $32.69.
Mercury Systems
Many across Wall Street see this as one of the only pure-plays on defense electronics. Mercury Systems Inc. (NASDAQ: MRCY) provides secure processing subsystems for various critical defense and intelligence programs in the United States.
The company’s products and solutions are deployed in approximately 300 programs with 25 defense prime contractors. Its principal programs include Aegis, Patriot, Surface Electronic Warfare Improvement Program, Gorgon Stare, Predator, F-35 and Reaper.
Mercury Systems also designs, markets and licenses software and middleware environments under the MultiCore Plus name to accelerate development and execution of signal and image processing applications on a range of heterogeneous and multi-computing platforms.
Truist Securities has set a $90 target price. The consensus target is $82.14, and shares closed at $65.75 on Wednesday.
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Given the volatile situations around the globe, and big foreign purchasing, the sector remains a good place to keep capital in growth portfolios. With the potential for the market to remain precarious in 2021, it may make sense to buy shares now, a little at a time perhaps, and see how earnings for the second quarter come in.
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