Zacks Equity Research discusses Northrop Grumman NOC, General Dynamics GD and Textron TXT.

Industry: Aerospace – Defense

Link: https://www.zacks.com/commentary/2159127/3-aerospace-defense-stocks-to-buy-amid-improved-defense-bill

Improved budgetary provision offered by the U.S. government, as witnessed from the approved defense bill, is expected to bode well for aerospace-defense companies that are primarily engaged in combat space. However, lingering supply-chain challenges might continue to delay deliveries and thereby remain a threat to the industry players.

Nevertheless, improved projections for air travel, as stated by the International Air Transport Association (IATA), are expected to bode well for companies that are engaged in commercial aerospace operations. The frontrunners in the aerospace-defense industry are Northrop Grumman, General Dynamics and Textron.

About the Industry

The Zacks Aerospace-Defense industry comprises companies that primarily design and manufacture heavy-built products like commercial as well as military jets and helicopters, tankers and other combat vehicles, missiles, combatant ships as well as auxiliary ships, submarines, bombs, guns, space transportation vehicles, military satellites and a few more. The industry also includes cyber security players who offer information technology services and C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions. A portion of its revenues comes from defense contractors offering spare parts, aircraft modification, ship repair and overhaul services, and supply-chain management services.

4 Trends Shaping the Future of the Aerospace-Defense Industry

Improved Air Traffic Outlook Boosts Prospects: Recovering global air traffic data in recent times has boosted the near-term growth prospects of the industry. As stated in the latest report published by the IATA, industry-wide global RPK increased 26.2% year over year in July 2023, thereby reaching 95.6% of the traffic numbers seen in 2019.

Looking ahead, IATA projects industry-wide RPKs to reach 87.8% of the 2019 level in 2023, as stated in its latest global outlook for air transport. Such impressive projections bode well for commercial aerospace manufacturers that have long borne the brunt of poor air travel in the form of delayed jet deliveries and, in some cases, cancellation of orders by airlines.

Expanding Defense Budget Remains a Growth Catalyst: While the commercial aerospace market has been recovering steadily over the past couple of quarters, the defense side of the industry stood its ground amid the COVID-19 crisis, cushioned by steady government support. To this end, it is imperative to mention that in June 2023, the U.S. defense bill for fiscal 2024, reflecting a 3.6% increase over the fiscal 2023 enacted level, got its approval. Such improved budgetary provisions set the stage for industry players focused on the defense business to win more contracts, which is likely to boost their top line.

Supply-Chain Issues May Hurt: Significant supply-chain disruption impacted the Aerospace and Defense industry, thanks to the pandemic-induced lower aircraft demand and restrictions on the movement of people and goods. This primarily affected small suppliers like aircraft part manufacturers, especially those with heavy exposure to commercial aerospace, and the aftermarket business.

Although the global economy has started to improve, aircraft manufacturers project supply-chain issues to continue to delay aircraft production and deliveries, as estimated by IATA. This, in turn, might constrict the growth trajectory of the U.S. Aerospace and Defense industry, to some extent, in the near term.

Strengthening Dollar Adds to Industry Woes: The recently appreciating U.S. dollar is adding another layer of cost to airlines that are already burdened with high inflation and rising jet fuel prices. The Federal Reserve’s policy rate now stands in the 5.25-5.50% range as of September 2023, having started at 0.25% in 2022. All U.S. dollar-denominated costs are rising for airlines that earn revenues in non-U.S. currency.

Similarly, the debt burden has increased for all non-dollar-based entities that have borrowed in dollars. Such a burden on airlines might lead to lower aircraft delivery, thereby hurting aerospace-defense industry players that particularly operate in commercial aerospace.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Aerospace-Defense industry is housed within the broader Zacks Aerospace sector. It currently carries a Zacks Industry Rank #102, which places it in the top 41% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Before we present a few aerospace-defense stocks that you may want to add to your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Lags S&P 500 & Sector

The Aerospace-Defense industry has underperformed the Zacks S&P 500 Composite as well as its own sector over the past year. The stocks in this industry have collectively lost 4.4% compared with the Aerospace sector’s decline of 1.5%. The Zacks S&P 500 Composite has gone up 13.5% in the said time frame.

Industry’s Current Valuation

On the basis of the trailing 12-month EV/Sales ratio, which is used for evaluating capital-intensive stocks like aerospace-defense, the industry is currently trading at 2.01 compared with the S&P 500’s 3.41 and the sector’s 2.04.

Over the past five years, the industry has traded as high as 2.46X, as low as 2.01X and at the median of 2.29X.

3 Aerospace-Defense Stocks to Keep in Your Portfolio

Northrop Grumman: Based in Falls Church, VA, Northrop Grumman supplies a broad range of products and services to the U.S. Department of Defense, including electronic systems, information technology, aircraft, space technology and systems integration services. On Sep 12, 2023, NOC announced that its B-21 Raider bomber aircraft continued to progress in ground testing with the commencement of engine runs. Once this jet becomes available in the market, NOC can be expected to receive a solid inflow of orders from Pentagon and other U.S. allies, as nations across the world continue to boost their defense spending.

The Zacks Consensus Estimate for the company’s 2023 sales implies an improvement of 5.8% from the 2022 reported figure. NOC boasts a long-term earnings growth rate of 3.7%. It currently carries a Zacks Rank #2 (Buy).

General Dynamics: Based in Falls Church, VA, General Dynamics is a prominent combat shipbuilder in the United States, along with a leading designer and builder of nuclear-powered submarines. It also manufactures business jets as well as renowned combat vehicles. On Oct 2, 2023, the company secured a contract worth $218 million for production of 155mm M1128 Load, Assemble, and Pack (LAP). This contract win boosts GD’s revenue generation prospects as well as strengthens its position in the artillery market.

General Dynamics currently boasts a long-term earnings growth rate of 9.2%. The Zacks Consensus Estimate for the company’s 2023 sales implies an improvement of 7.8% from the 2022 reported figure. GD currently carries a Zacks Rank #2.

Textron: Based in Providence, RI, Textron is a global multi-industry company that manufactures aircraft, automotive engine components and industrial tools. The company is known globally for its most recognizable and valuable brand names, such as Bell Helicopter, Cessna Aircraft Company, Jacobsen, Kautex, E-Z-GO and Greenlee.

On Sep 26, 2023, Textron announced that the Garmin G5000 integrated flight deck will soon be available for the Cessna Citation XLS+ and XLS Gen2, as well as for installation at the Textron Aviation Service Centers, following supplemental type certification approval by the FAA (anticipated in the first half of 2024). This should further bolster TXT’s position in the rapidly growing business jet market.

The company currently boasts a long-term earnings growth rate of 11.7%. The Zacks Consensus Estimate for Textron’s 2023 sales implies an improvement of 5.8% from the 2022 reported figure. TXT currently holds a Zacks Rank #2.
Northrop Grumman Corporation (NOC): Free Stock Analysis Report

General Dynamics Corporation (GD): Free Stock Analysis Report

Textron Inc. (TXT): Free Stock Analysis Report

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