The U.S. aerospace and defense stocks have seen significant upward trends so far this year, primarily on the back of increasing geopolitical uncertainties worldwide. While a number of industry bellwethers posted encouraging results, the Aerospace sector also reaped the benefits. This impressive performance is anticipated to continue for the remaining half of the year as well, driven by the same factors which stoked the sector’s robust growth year to date.
Sector Behemoths Impress in Q2
Many sector behemoths have gained significantly year to date and posted improved earnings during the second quarter. In the Aerospace and Defense space, 90% of the stocks topped earnings and 70% exceeded revenue expectations, in the quarter. Undoubtedly, such bullish releases make us optimistic about the sector’s improved performance as we move into the reporting cycle for second half of the year. Below we have mentioned second-quarter earnings releases from a handful of the defense biggies:
Lockheed Martin Corp. LMT reported better-than-expected second-quarter earnings and revenues with both surpassing the Zacks Consensus Estimate by 4.2% and 1.8%, respectively.
Additionally, Huntington Ingalls Industries, Inc. HII reported upbeat second-quarter 2017 results with revenues and earnings beating the Zacks Consensus Estimate by 22.5% and 4.1%, respectively. Earnings and revenues of Raytheon Company RTN also topped the Zacks Consensus Estimate during the second quarter by 13.8% and 0.9%, respectively.
Factors Favoring the Defense Sector
Currently, geo-political tensions, international terrorist acts threatening the security of nations and intra-national conflicts are on the rise. This in turn is leading to many civil wars, thus creating a lucrative growth opportunity for defense contractors.
Again, factors like a growing international market for weaponries with many developing nations expanding their defense spending, the advent of innovative technologies in warfare and their increasing application as well as increased demand for cost-efficient production are driving revenue growth in the U.S. Aerospace & Defense space.
In particular, a notable increase in the U.S. defense budget under President Trump has bolstered investors’ optimism on this industry’s ascension. In this regard, the U.S. House passed the fiscal 2018 defense policy bill worth $696.5 billion on Jul 14 that extensively surpassed Trump’s earlier budget request.
In addition to catering to a large domestic market, the U.S. defense majors are expanding their foreign markets rapidly, taking advantage of regional tensions prevailing in the Middle East. Rising defense spending by other major regional powers such as Japan and India are also boosting these stocks’ prospect.
Toward this end, it is to be noted that foreign military sales play a vital role in the growth story of U.S. defense stocks. The arms deal worth $110 billion signed by Trump with Saudi Arabia this May is reflective of this. Notably, this deal has the potential to touch $350 billion over 10 years.
Other elements driving this sector include Trump’s defense strategy apart from the budgetary amendments. To this end, Trump's speech involving enhanced military spending in Afghanistan moved the defense stocks to a higher trajectory. Furthermore, the ongoing altercation between Trump and North Korean leader Kim Jong-un on the terms of frequent missile testing from the both the nations, sent the major defense stocks rallying.
Zacks Industry Rank
We have 265 industries in our Zacks Coverage Universe, which we put into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank). (To learn more visit: About Zacks Industry Rank)
The Aerospace is one of the 16 broad Zacks sectors within the Zacks Industry classification. Aerospace/defense is one of the industries under the sector, with a Zacks Industry Rank #37. This indicates that the industry lies in the top half.
Our Picks
Defense stocks have been doing well this year. The trend is likely to persist in days ahead, as the aforementioned factors continue to drive the sector.
Picking investment-worthy performers for your portfolio will be a smart move to capitalize on the gains ahead. This is why we recommend you to add these defense stocks to your portfolio now. We have narrowed down our search based on a favorable Zacks Rank and other commendable metrics.
The Boeing Co. BA is the largest aircraft manufacturer in the world in terms of revenue, orders and deliveries. It is also one of the largest aerospace and defense contractors.
Boeing currently holds a Zacks Rank #2 (Buy) and its projected EPS growth for the next five years is 13%. Its Zacks Consensus Estimate for the current-year earnings moved up 1.2% over the last 30 days.
Moreover, the company’s stock has surged 54% on a year-to-date basis, outperforming the broader industry’s gain of 28.2%.
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Spirit Aerosystems Holdings, Inc. SPR is the world's largest independent supplier of commercial airplane assemblies and components.
Spirit Aerosystems’ projected EPS growth for the next five years is 10.8%. Its Zacks Consensus Estimate for the current-year earnings climbed 8.3% over the last 30 days. The company currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Further, the company’s stock has rallied 27.7% on a year-to-date basis, outperforming the broader industry’s gain of 22.1%.
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Raytheon Co. is one of the largest aerospace and defense companies in the United States with a diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems, and technical services.
Raytheon’s projected EPS growth for the next five years is 9.7%. Its Zacks Consensus Estimate for the current-year earnings inched up 0.4% over the last 30 days. The company currently has a Zacks Rank #3 (Hold).
The company’s stock has rallied 28.2% on a year-to-date basis, outperforming the broader industry’s gain of 22.1%.
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