Durable orders increased by 0.8% in April after rising by 3.6% in March. This may seem to be a significant decline, but is not being viewed as a hugely negative signal by market analysts. In fact, it was widely expected that orders for durable manufactured goods would decline. Additionally, March orders have also been revised upwards from the earlier figure of 2.6%.
Military Aircraft Powers Growth
Defense aircraft have been the major reason for the increase in durable orders, rising by 13.1%. This has helped to offset the 4.1% decline in commercial aircraft demand. Motor vehicle orders have also dropped 1% after edging up 0.3% in March. But military aircraft demand has triggered a 2.3% increase in demand for transportation goods.
A matter of greater concern is the quality of growth these numbers indicate. Demand for core capital goods is considered to be an indicator of plans for business investment. This number has declined by 1.2% over the month of April. However, investment is expected to pick up going forward as demand also rises.
Does Sequestration Matter?
The sequester that went into effect at the start of Mar 2013 will cut spending by a total of approximately $1.1 trillion over the 8-year period from 2013 to 2021.Yet, the aerospace and defense industry is holding up well in 2014 thanks to technological innovations, big contracts, acquisitions and growing commercial demand.
Since the domestic aerospace and defense sector is facing budget cuts and a constrained spending environment, the industry is looking for growth from international orders. Additionally, a number of emerging markets as well as developed nations such as India, Japan, the United Arab Emirates, Saudi Arabia and Brazil are boosting defense spending and generating business for the U.S. aerospace and defense companies.
Below we present three defense aircraft stocks which possess the potential to grow appreciably, each of which also has a good Zacks rank.
Northrop Grumman Corporation
Northrop Grumman (NOC) supplies a broad array of products and services to the U.S. Department of Defense (DoD), including electronic systems, information technology, aircraft, space technology, and systems integration services.
Northrop Grumman reported first-quarter 2014 adjusted earnings of $2.40 per share, surpassing the Zacks Consensus Estimate of $2.15 by 11.6%. Last week, Northrop Grumman Corp. boosted its annual dividend by 15.0%, marking the 11th consecutive annual increase.
Northrop Grumman Corporation holds a Zacks Rank #3 (Hold) and has expected earnings growth of 16.9%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 13.05.
Lockheed Martin Corporation
Lockheed Martin (LMT) is the largest defense contractor in the world. The company’s aeronautics business is engaged in the design, research and development, systems integration, production and support of advanced military aircraft and related technologies.
The company reported first quarter 2014 earnings of $2.87 per share, comfortably surpassing the Zacks Consensus Estimate of $2.52 by 13.9%. Last month, Lockheed declared a dividend of $1.33 per share for the second quarter 2014. The dividend is payable on Jun 27, 2014 to holders of record as of the close of business on Jun 2, 2014.
Currently the company holds a Zacks Rank #3 (Hold) and has expected earnings growth of 0.90%. It has a P/E (F1) of 14.83.
The Boeing Company
Boeing’s (BA) first quarter revenue from its defense, space & security segment was $7,633 million. Global Services & Support registered an improvement of 6%. Deliveries in the defense and space business numbered 46 in the first quarter 2014 compared with 45 in the comparable period last year.
The company reported adjusted first quarter 2014 earnings of $1.76 per share, beating the Zacks Consensus Estimate as well as ahead of the year-ago adjusted profit of $1.54 by 14.3%.
Apart from a Zacks Rank #3 (Hold), Boeing has expected earnings growth of 8.4% for the next financial year. It has a P/E (F1) of 17.50.
The defense aircraft segment has overcome the effects of sequestration and has also found new markets to support growth. This is why these stocks would make good additions to your portfolio.
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