Given the issues that the president has with European countries over their participation in the costs for NATO, you can also bet that he would like them to do more business with American defense companies. The Aerospace and Defense sector overall has been very strong for the past few years, and although some companies have backed up some in price, there is a good chance some winners will emerge when second-quarter earnings are released.
In a new research report, Baird feels that there is an upward bias for most of the companies in the sector and that strength could be apparent in the coming earnings reports. The report noted this:
We are previewing 17 companies for the current second quarter 2018 period. Most defense companies should have upside to results as incremental growth from domestic outlays continue to provide tailwinds for earnings and cash flow in the second quarter. Momentum for both aerospace original equipment manufacturers and aftermarket should continue with strong reports.
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Baird suggests investors own these four top stocks into the earnings prints. All are rated Overweight at Baird.
Boeing
This stock has sold off recently and is providing a solid entry point. Boeing Co. (NYSE: BA) is the world’s leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined.
The different segments in the company are: Commercial Airplanes; Boeing Defense, Space & Security;, and Boeing Capital, which provides financial solutions facilitating sale and delivery of Boeing commercial and military aircraft, satellites, and launch vehicles.
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.
Shareholders are paid a 2.05% dividend. Baird has a stunning $450 price objective, and the Wall Street consensus target price is $398.13. The stock closed Thursday at $346.03. Boeing is scheduled to report earnings on July 25.
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Northrop Grumman
The top defense company was ranked as one of the top five defense contractors by sales last year. Northrop Grumman Corp. (NYSE: NOC) provides innovative systems, products and solutions in unmanned systems, cyber, C4ISR and logistics and modernization to government and commercial customers worldwide.
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 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.
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The Technical Services segment provides logistics, modernization, and sustainment services; and other advanced technology and engineering services, including space, missile defense, nuclear security, training, and simulation services.
Northrop Grumman shareholders receive a 1.53% dividend. The Baird price objective is $394, and the consensus price target is $372.06. Shares closed on Thursday at $322.13. The company is slated to report on July 25 as well.
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Spirit AeroSystems
This top aerospace and defense stock offers solid upside potential. Spirit AeroSystems Holdings Inc. (NYSE: SPR) is one of the world’s largest non-OEM (original equipment manufacturer) designers and manufacturers of aerostructures for commercial aircraft. Spirit’s core products include fuselages, pylons, nacelles and wing components.
Additionally, Spirit provides aftermarket customer support services, including spare parts and 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.
Baird feels that the cost challenges that company have experienced on 737-MAX are in rearview mirror for the rest of 2018, and they see a continued strong free-cash-flow outlook and stock buybacks.
Shareholders receive just a 0.57% dividend. The $129 Baird price target is well above the $103.32 consensus target. The stock closed on Thursday at $85.30. The company is expected to report on August 1.
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Textron
This company has acted very well. Textron Inc. (NYSE: TXT) is a multi-industrial conglomerate that has the following operating segments:
- Textron Aviation manufactures light-to-medium-sized aircraft.
- Bell comprises Bell Helicopter and Textron Systems.
- Industrial Products manufactures machinery and equipment for golf/turf, wire and cable installation systems, plastic fuel tanks (Kautex), pumps, gears and gearboxes.
- Textron Financial is a commercial lending operation that primarily provides equipment financing.
The company has a very solid new product pipeline, and analysts feel the company is demonstrating that new products are the superior solution to combating tough end markets.
Textron recently announced that it has completed the sale of its Tools & Test businesses and brands to Emerson, a global technology and engineering company, for approximately $810 million in cash. Included in the sale were all the Textron Tools & Test businesses and brands. Proceeds from the sale are expected to be used to fund additional share repurchases to offset the earnings impact related to the sale.
Textron investors receive a 0.12% dividend. Baird has set its price target at $72. The posted consensus target is $71.42, and the stock closed Thursday at $66.71. The company is scheduled to report on July 18.
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These four top stocks to buy before earnings all make good sense for long-term growth portfolios. Given that some have pulled back sharply, that may allow investors to be somewhat more aggressive in buying shares.
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