Aerospace and defense stocks were crushed along with the rest of the market in the fourth quarter, but unlike tech stocks that get caught up in global trade concerns, the top stocks are rarely subject to tariffs. Yet the sector is down a stunning 23% since October 1, compared with a more than 11% decline in the S&P 500. With investors concerned over the prospects for many companies going forward, the defense and aerospace sector may offer some of the best value now.
SunTrust analysts feel that an assumption that spending on the sector has peaked contributed to the massive sector sell-off. They noted this when discussing defense-related stocks:
The global threat environment remains elevated, defense spending outlays should grow at a solid rate, and we believe the release of the fiscal year 2020 budget will alleviate concerns that the defense budget has peaked. Moreover, we think the sector remains largely insulated from broader global macro risks offering unmatched visibility, relative to its broader industrial peers, over the next 24-36 months.
These four top defense stocks are rated Buy at SunTrust, and all make sense for long-term growth accounts.
Aerojet Rocketdyne
While perhaps a lesser known name to investors, this stock may offer among the best value going forward. Aerojet Rocketdyne Holdings Inc. (NYSE: AJRD) engages in the provision of innovative solutions in the field of aerospace and defense, as well as in the field of real estate.
The Aerospace & Defense segment operates through the Aerojet Rocketdyne in the developing and manufacturing of aerospace and defense products and systems for the U.S. government, the National Aeronautics and Space Administration (NASA), major aerospace and defense prime contractors and portions of the commercial sector.
The Real Estate segment operates through Easton Development Company in re-zoning, entitlement, sale and leasing of excess real estate assets.
The SunTrust price target for the stock is $40, and the Wall Street consensus target is $38.33. The shares closed Thursday at $36.68, up almost 3% on the day.
FLIR Systems
This stock offers excellent upside potential and a more moderate valuation. FLIR Systems Inc. (NASDAQ: FLIR) designs, develops, markets and distributes thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems and threat-detection solutions. The company’s segments include Surveillance, Instruments, Security, OEM & Emerging Markets, Maritime and Detection.
The Instruments segment provides devices that image, measure and assess thermal energy, gases and other environmental elements for industrial, commercial and scientific applications under the FLIR and Extech brands. The OEM & Emerging Markets segment provides thermal imaging camera cores and components. The Maritime segment develops and manufactures electronics and imaging instruments, and the Security segment develops and manufactures a range of cameras and video recording systems.
Investors receive a 1.5% dividend. SunTrust has a $55 price target, and the consensus target is $58. Shares closed on Thursday at $44.64.
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L3 Communications
Many analysts across Wall Street like this company. L3 Communications Holdings Inc. (NYSE: LLL) provides aerospace systems and a range of communication and electronic systems and products used on military and commercial platforms in the United States and internationally.
The company operates in three segments: Electronic Systems, Aerospace Systems and Communication Systems. It offers a range of products and services, including components, products, subsystems and systems, as well as related services to military and commercial customers in business areas, including precision engagement and training, power and propulsion systems, aviation products and security systems, sensor systems, warrior systems, and optics, telescopes and precision optical subsystems.
L3 Technologies produces electro-mechanical and mechanical fuzes to support missiles and artillery systems that enable for high-speed and high-accuracy sensors. Raytheon’s AIM-9X Sidewinder missiles bolster L3’s fuzing capabilities. It is expected to see some ancillary revenue from the huge Saudi deal signed last year.
Investors receive a 1.9% dividend. The $224 SunTrust price objective compares with a $233.85 consensus figure and the most recent close at $173.20.
Mercury Systems
SunTrust sees 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. Its products and solutions are deployed in approximately 300 programs with 25 defense prime contractors.
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.
SunTrust has set its price target at $54. The consensus target is $55, and shares closed Thursday at $47.95.
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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 2019, it may make sense to scale-buy shares now, a little at a time, and see how the fourth-quarter earnings come in.
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