One sector that has stayed out of the spotlight over the past year has been aerospace and defense. While the pandemic weighed heavily on aerospace, the defense side was somewhat ignored as fund managers started to rotate to cyclical stocks and value plays. The reality is that in an expensive stock market like we find ourselves in now, the sector may be one of the best ideas, not only for the third quarter but for the rest of the year as well.
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A new Baird research report takes a close look at the sector, and the analysts are very positive on some of the large-capitalization leaders. They think these companies will not only beat current Wall Street estimates but could very well also provide solid forward guidance for the rest of the year. The report said this:
We expect solid second quarter 2021 reports from defense companies with outlooks meeting/exceeding expectations, whereas aerospace prints should be turning the corner as aftermarket faces easier comps and flight activity continues to improve. We are previewing 19 companies with upcoming reports before mid-August with defense showing most upside to results tied to a spending tailwind.
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We screened the 19 companies Baird reported on, looking for stocks that were rated Outperform and had the potential to give positive forward guidance. We found four that look like outstanding ideas before the earnings are released. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
General Dynamics
Like other major defense prime contractors, this submarine and tank builder looks poised to deliver solid numbers and guidance. General Dynamics Corp. (NYSE: GD | GD Price Prediction) 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.
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Baird expects General Dynamics to modestly beat earnings expectations and raise guidance. The firm also expects solid numbers from the Gulfstream jet division.
Investors receive a 2.48% dividend. The Baird price target for the shares is $243, and the Wall Street consensus target is just $199.94. General Dynamics stock closed on Wednesday at $191.63 per share.
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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.
Baird expects the company to beat earnings expectations and increase 2021 guidance to go along with very solid cash flow numbers for 2021 to 2023.
Lockheed Martin stock investors receive a 2.73% dividend. Baird has a $394 price target, and the consensus target is up at $427.72. The shares closed at $380.89 on Wednesday.
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Raytheon Technologies
This stock has rallied smartly this year off of 52-week lows but still offers perhaps the best value in the sector. Raytheon Technologies Corp. (NYSE: RTX) is an industry leader in defense, government electronics, space, information technology and technical services.
With a history of innovation spanning 97 years, Raytheon provides state-of-the-art electronics, mission systems integration, C5I products and services, sensing, effects and mission support for customers in more than 80 countries.
In 2019, United Technologies and Raytheon agreed to merge their businesses to create a new aerospace and defense powerhouse. The two companies received unanimous approval from their respective boards, and the merger is finally complete, with the new company now called Raytheon Technologies.
The Baird analysts anticipate an earnings beat and an increase in forward guidance from Raytheon. They highlight that the improving aerospace aftermarket demand supports upside to the current outlook.
Shareholders receive a 2.36% dividend. The $100 Baird price objective is higher than the $98.59 consensus figure. Raytheon Technologies stock closed at $86.58.
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Textron
This stock also has acted very well this year but still has solid upside potential. Textron Inc. (NYSE: TXT) operates in the aircraft, defense, industrial and finance businesses worldwide. Its Textron Aviation segment manufactures, sells and services business jets, turboprop and piston engine aircraft and military trainer and defense aircraft. It makes commercial parts, as well as offers maintenance, inspection and repair services. The company’s Bell segment supplies military and commercial helicopters, tiltrotor aircraft and related spare parts and services.
The Textron Systems segment offers unmanned aircraft systems, unmanned surface systems, mission command hardware and solutions and customer support and logistics services; simulation, training and other defense and aviation mission support products and services; airborne and ground-based sensors and surveillance systems and protection systems; precision-guided weapons systems; marine craft, armored vehicles and specialty vehicles used for fire and rescue applications; test equipment, electronic warfare test and training and intelligence software solutions; and piston aircraft engines. It also designs, develops, manufactures, installs and maintains full flight simulators.
Its Industrial segment offers blow-molded plastic fuel systems, including conventional plastic fuel tanks and pressurized fuel tanks for hybrid vehicle applications, clear-vision systems, and plastic tanks for catalytic reduction systems primarily to automobile OEMs; and golf cars, off-road utility vehicles, recreational side-by-side and all-terrain vehicles, snowmobiles, light transportation vehicles, aviation ground support equipment, professional turf-maintenance equipment, and turf-care vehicles to golf courses and resorts, government agencies and municipalities, consumers, outdoor enthusiasts and commercial and industrial users. The company’s Finance segment provides financing to purchase new and pre-owned aircraft and helicopters.
Baird sees the company beating the consensus forecast and raising guidance. The firm also sees better deliveries at the aviation unit and business jet orders picking up.
Investors receive just a 0.12% dividend. Baird has set a $72 price target. The consensus target is $76.14, and Textron stock closed at $68.66 a share.
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These four top stocks to buy before earnings all make good sense for long-term growth portfolios. Given that they have been very solid in the past year, it may make sense to buy partial positions and see if we don’t get a seasonal pullback between August and October.
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