No matter what time 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 down, it always makes sense to have positions in the defense and aerospace arena.
In a new research report from the defense and aerospace team at Baird, they make a solid case that the sector could continue to outperform the rest of 2019 and into next year. The analysts previewed seventeen top companies, so we screened the research looking for the large capitalization leaders that were rated Outperform, and found five industry leaders that look like solid picks for long-term growth investors.
Boeing
This company has had a public relations nightmare due to the 737 MAX issues. Boeing Co. (NYSE: BA | BA Price Prediction) is the world’s leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined. It is also one of the most valuable brands in the world.
The different segments in the company are Commercial Airplanes, Boeing Defense, Space & Security and Boeing Capital. The latter provides financial solutions facilitating sale and delivery of Boeing commercial and military aircraft, satellites and launch vehicles.
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Last year, 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.
While the 737 MAX troubles are far from over, the tide is finally turning for the company, and the firm was basically upbeat at the recent Paris Air Show. The 737 MAX software update is complete and the company is working on training and education materials and certification processes now. Once it returns to flight, deliveries may be higher than the production rate, and long-term expectations on production have not changed.
Boeing shareholders receive a 2.33% dividend. The Baird price objective is a whopping $470, and the Wall Street consensus target price is $415.09. The stock closed trading on Wednesday at $352.30.
General Dynamics
This company, like other major defense prime contractors, has had a very solid year. General Dynamics Corp. (NYSE: GD) is engaged in business aviation, land and expeditionary combat vehicles and systems, armaments, munitions, shipbuilding and marine systems, and information systems and technologies.
Major products include Virginia-class nuclear-powered submarine and Ohio class replacement, Arleigh Burke-class Aegis, Abrams M1A2 tank, Stryker eight-wheeled assault vehicle, medium-caliber munitions and gun systems, tactical and strategic mission systems.
Investors in General Dynamics receive a 2.26% dividend. Baird has a $218 price target for the shares, recently raised from $188, while the consensus target is $201.63. The stock closed at $182.54 a share on Wednesday.
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Lockheed Martin
This is one of the top aerospace and defense stocks to buy, and many on Wall Street are expecting a very solid continuation of U.S. and foreign defense spending. Lockheed Martin Corp. (NYSE: LMT) researches, designs, develops, manufactures, integrates, operates and sustains advanced technology systems, products and services. It also provides a wide range of defense electronics products and IT services.
Being the Pentagon’s prime contractor, Lockheed Martin offers a diverse portfolio of global aerospace, defense, security and advanced technologies. Its leveraged presence in the Army, Air Force, Navy and IT programs guarantees a steady inflow of follow-on orders, not only from the U.S. government but also from many foreign allies of the nation.
Lockheed Martin investors receive a 2.39% dividend. The $371 Baird price objective is less than the $378.83 consensus target. The stock closed most recently at $368.16 per share.
Northrop Grumman
This 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.
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 1.63% dividend. Baird has raised its $300 price objective to $364. The consensus price target is $372.06, and shares closed on Wednesday at $324.06.
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Raytheon
This top defense company has a diversified mix of business and remains a favorite on Wall Street. Raytheon Co. (NYSE: RTN) is an industry leader in defense, government electronics, space, information technology and technical services. The company operates in four principal business segments: Integrated Defense Systems, Intelligence, Information and Services, Missile Systems, and Space and Airborne Systems.
Top Wall Street analysts feel that the company could be one of the biggest winners as the global threat environment has been heightened substantially this year, and with 31% of total sales from international, the prospects remain very positive. Many cite the Patriot Missile deal signed with Poland as a good example, which could propel 2019 and beyond earnings.
In addition, many think Raytheon has the balance sheet capacity to pre-fund its pension to take advantage of the currently higher tax deduction, which could eliminate or reduce mandatory pension funding and provide a lift to 2019 free cash flow and earnings. It is set up for continued strong orders from the wave of recent foreign military sales approvals and its strong pipeline of large international missile defense projects.
Raytheon shareholders receive a 2.13% dividend. Baird has set a $223 price objective, which is well above the $208 consensus figure. The shares closed most recently at $177 apiece.
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These five incredible companies dominate the sector and should continue to in the years to come. With second-quarter earnings right around the corner, it may make sense to buy partial positions here and see how the results come in.
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