The year 2017 has been an overwhelming one for the U.S. economy, courtesy of President Trump’s policies that came up with many positive market movements. The fiscal 2018 (FY18) budget proposal, in particular, along with a rising interest rate environment backed by improving economic backdrop as well as progress on tax reforms have helped the S&P 500 index surge 20.1%, so far this year.
Coming to the Aerospace sector, stocks in this space have been on a growth trajectory on anticipation of the new administration’s favoritism toward huge defense spending, since last year when Trump became the President. This year also the sector maintained similar trends.
Impressively, stocks in the Zacks Aerospace sector (a stand-alone sector) have rallied 38.1% on a year-to-date basis, significantly outperforming the S&P 500 index’s 20.1% gain. Below we have discussed the major factors that have influenced the stocks in this sector, in recent times.
Positives That Drove Aerospace Stocks: FY18 Budget and North Korea Tiff
The FY18 defense budget reflected a 10% hike from the FY16 level. In fact, a favorable defense spending strategy endorsed by the U.S. administration has been a primary force driving these stocks. In September 2017 the U.S. Senate passed the National Defense Authorization Act (NDAA), better known as the FY18 defense policy bill, worth roughly $700 billion that extensively surpassed Trump’s budget request. It authorized an additional $8.5 billion for the Missile Defense Agency to strengthen homeland, regional and space missile defense, which is $630 million higher than the new administration's request.
Meanwhile, there’s no denying that, while a slew of contract wins have been boosting defense stocks over the years, repeated counteractive missile-tests conducted by the United States and North Korea have been instrumental in the sector’s latest outperformance. In particular, following Trump’s strong condemning of North Korea’s hostile action, companies that either manufacture high-end missiles or offer missile surveillance services like Northrop Grumman Corp. NOC and Raytheon Company RTN, gained substantially.
Additionally, an anticipated military action in the Korean peninsula and a recent wave of mergers between big aerospace and defense companies have bolstered the sector’s performance. To fend off competition, Aerospace players are merging with their counterparts to restructure business models as well as expand their core operations and product lines. For example, United Technologies Corp. (UTX) decided to take over Rockwell Collins, Inc. for $30 billion this September. This mega deal is expected to create one of the world’s largest aircraft-equipment manufacturers.
In the same month, Northrop Grumman agreed to buy rocket-maker Orbital ATK, Inc., for $9.2 billion. Post the deal, Northrop Grumman will benefit from Orbital’s rocket motors, missiles and electro-optical countermeasure product lines.
Challenges Exist Too
Like all sectors, the Aerospace space is faced with multiple headwinds. For instance, questions are still being raised on the FY18 budget and the viability of such high spending.
Workforce-related issues like retaining aged workers along with employing graduates who lack technical acumen has been challenging the aerospace and defense industry. Per the Aviation Week & Space Technology 2017 Aerospace & Defense Workforce Study, approximately 60% of employees in this industry are over the age of 45 versus 44% in the overall U.S. workforce. Moreover, various regulations imposed on international trade of defense equipment remain the major deterrents to the sector’s growth.
Moreover, internationally many emerging nations are posing stiff competition to the U.S. defense contractors. For instance, China is developing space technologies to block U.S. military communications, per a report commissioned by a panel formed by Congress. Similarly, per a CNBC report, Russian defense officials have confirmed deploying radar-imagery jammers and developing laser weapons to counter U.S. intelligence and ballistic missile defense satellites.
Choosing the Winning Strategy
Considering all the aforementioned factors, we can say that Aerospace stocks exhibited a decent progress graph, so far this year, weathering all the headwinds. Notably, the stocks witnessed solid bottom-line profitability and top-line growth.
In order to save investors from the time-taking process of identifying the key winners that crushed the market and are likely to gain further, we have created a screen using the Zacks Stock Screener.(Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)
Herein, we have zeroed in on five Aerospace stocks, with a market cap of more than $5 billion, which have more than tripled the S&P 500 index so far. These stocks also bear a favorable Zacks Rank #1 (Strong Buy) or #2 (Buy) and long-term earnings growth of more than 5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Enhance Your Portfolio With These 5 Viable Picks
Curtiss-Wright Corporation CW: Based in Charlotte, NC, the company designs, manufactures, and overhauls precision components and provides engineered products and services to the aerospace, defense, power generation and general industrial markets.
Zacks Rank: 1
Market Cap: $5.3 billion
Projected EPS Growth (three to five years): 12.4%
Shares of Curtiss-Wright have gained 25.3% year to date, outperforming the 20.1% rally of the S&P 500.
Huntington Ingalls Industries, Inc. HII: Based in Newport News, VA, the company designs, builds and maintains nuclear-powered ships such as aircraft carriers and submarines, and non-nuclear ships.
Zacks Rank: 2
Market Cap: $10.6 billion
Projected EPS Growth (three to five years): 15%
Shares of Huntington Ingalls have moved up 29.2% year to date, outperforming the 20.2% gain of the S&P 500.
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Leidos Holdings, Inc. LDOS: Based in Reston, VA, the company provides technology and engineering services and solutions in the defense, intelligence, civil and health markets.
Zacks Rank: 2
Market Cap: $9.7 billion
Projected EPS Growth (three to five years): 10%
Shares of Leidos Holdings have gained 27.2% year to date, outperforming the 20.1% rally of the S&P 500.
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Heico Corporation HEI: Based in Hollywood, FL, the company is a rapidly growing aerospace and electronics corporation focused on niche markets and cost-saving solutions for customers.
Zacks Rank: 2
Market Cap: $7.8 billion
Projected EPS Growth (three to five years): 9.3%
Shares of Heico Corp have rallied 57% year to date, outperforming the 20.1% upside of the S&P 500.
Teledyne Technologies Incorporated TDY: Based in Thousand Oaks, CA, the company, provides instrumentation, digital imaging, aerospace and defense electronics in the United States, Canada and internationally.
Zacks Rank: 1
Market Cap: $6.4 billion
Projected EPS Growth (three to five years): 7.5%
Shares of Teledyne Technologies have gained 47.8% year to date, outperforming the 20.1% rally of the S&P 500.
Bottom Line
With a majority of macroeconomic factors favoring this industry, such outperformance can be expected to continue in the days ahead as well. Notably, the picture for the fourth quarter of 2017 is impressive. The sector’s earnings are expected to improve 7.3% in the ongoing quarter, while revenues are expected to see 5.2% improvement (as of Dec 8, 2017).
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