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3 Aerospace-Defense Stocks to Buy as Air Traffic Steadily Grows
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The recent signing of the Defense Bill worth $886 billion by the U.S. President is expected to bode well for aerospace-defense companies that are primarily engaged in combat space. However, consistent supply-chain issues might lead to lower jet deliveries and thereby remain a threat to the industry players. Nevertheless, improved projections for air travel, as stated by the International Air Transport Association (IATA), are expected to bode well for companies that are engaged in commercial aerospace operations. The frontrunners in the aerospace-defense industry are Safran (SAFRY - Free Report) , Textron (TXT - Free Report) and Leidos Holdings (LDOS - Free Report) .
About the Industry
The Zacks Aerospace-Defense industry comprises of companies that primarily design and manufacture heavy-built products like commercial as well as military jets and helicopters, tankers and other combat vehicles, missiles, combatant ships as well as auxiliary ships, submarines, bombs, guns, space transportation vehicles, military satellites and a few more. The industry also includes cyber security players who offer information technology services and C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions. A portion of its revenues comes from defense contractors offering spare parts, aircraft modification, ship repair and overhaul services, and supply-chain management services.
4 Trends Shaping the Future of the Aerospace-Defense Industry
Improved Air Traffic Outlook Boosts Prospects: Recovering global air traffic data in recent times has boosted the near-term growth prospects of the industry. As stated in the latest report published by the IATA, industry-wide global RPK increased 40.1% year over year through September 2023, thereby reaching 92.9% of the traffic numbers seen in 2019. Looking ahead, IATA projects air passenger revenue growth of 38% year over year in 2023.Such impressive projections bode well for commercial aerospace manufacturers that have long borne the brunt of poor air travel in the form of delayed jet deliveries and, in some cases, cancellation of orders by airlines.
Expanding Defense Budget Remains a Growth Catalyst: While the commercial aerospace market has been recovering steadily over the past couple of quarters, the defense side of the industry stood its ground amid the COVID-19 crisis, cushioned by steady government support. To this end, it is imperative to mention that in December 2023, U.S. President Joe Biden signed the U.S. defense policy bill that authorizes a record $886 billion in annual military spending, thereby increasing the nation's total national security budget by about 3%. Such improved budgetary provisions set the stage for industry players focused on the defense business to win more contracts, which is likely to boost their top line.
Supply-Chain Issues May Hurt: Significant supply-chain disruption impacted the Aerospace and Defense industry, thanks to the pandemic-induced lower aircraft demand and restrictions on the movement of people and goods. This primarily affected small suppliers like aircraft part manufacturers, especially those with heavy exposure to commercial aerospace, and the aftermarket business. Although the global economy has started to improve, supply-chain issues are expected to continue to keep aircraft deliveries in 2023 lower than the 2019 level, as estimated by IATA. This, in turn, might constrict the growth trajectory of the U.S. Aerospace and Defense industry, to some extent, in the near term.
Strengthening Dollar Adds to Industry Woes: The recently appreciating U.S. dollar is adding another layer of cost to airlines that are already burdened with high inflation and rising jet fuel prices. The Federal Reserve’s policy rate now stands in the 5.25-5.50% range as of September 2023, having started at 0.25% in 2022. All U.S. dollar-denominated costs are rising for airlines that earn revenues in non-U.S. currency. Similarly, the debt burden has increased for all non-dollar-based entities that have borrowed in dollars. Such a burden on airlines might lead to lower aircraft delivery, thereby hurting aerospace-defense industry players that particularly operate in the commercial aerospace.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Aerospace-Defense industry is housed within the broader Zacks Aerospace sector. It currently carries a Zacks Industry Rank #46, which places it in the top 18% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few aerospace-defense stocks that you may want to add to your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Aerospace-Defense industry has underperformed the Zacks S&P 500 Composite as well as its own sector over the past year. The stocks in this industry have collectively lost 6.3% compared with the Aerospace sector’s decline of 1.5%. The Zacks S&P 500 Composite has gone up 24.9% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month EV/Sales ratio, which is used for evaluating capital-intensive stocks like aerospace-defense, the industry is currently trading at 2.22 compared with the S&P 500’s 3.72 and the sector’s 2.29.
Over the past five years, the industry has traded as high as 3.08X, as low as 1.49X and at the median of 2.39X, as the charts show below.
EV-Sales Ratio TTM
3 Aerospace-Defense Stocks to Keep in Your Portfolio
Leidos Holdings: Based in Reston, VA, Leidos is a global science and technology leader that serves the defense, intelligence, civil and health markets. Its core capabilities include providing solutions in the fields of cybersecurity; data analytics; enterprise IT modernization; operations and logistics; sensors, collection and phenomenology; software development; and systems engineering. On Dec 21, 2023, Leidos announced the delivery of the first Enduring Shield launchers. The Enduring Shield program supports the U.S. Army’s Indirect Fire Protection Capability Increment 2 (IFPC Inc 2) program, which is a critical part of the Department of Defense’s layered defense strategy.
The Zacks Consensus Estimate for the company’s 2023 sales implies an improvement of 5.9% from the 2022 reported figure. LDOS boasts a long-term earnings growth rate of 8.1%. It currently carries a Zacks Rank #2 (Buy).
Price & Consensus: LDOS
Safran: Based in France, Safran produces aircraft and rocket engines and propulsion systems. On Dec 6, 2023, the company signed a framework agreement with the Moroccan government, outlining a mutual commitment to support and develop Morocco’s aerospace industry ecosystem. This would strengthen Safran’s footprint in the global aerospace-defense space.
Safran currently boasts a long-term earnings growth rate of 34.3%. The Zacks Consensus Estimate for the company’s 2023 sales implies an improvement of 37.3% from the 2022 reported figure. SAFRY currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: SAFRY
Textron: Based in Providence, RI, Textron is a global multi-industry company that manufactures aircraft, automotive engine components and industrial tools. The company is known globally for its most recognizable and valuable brand names, such as Bell Helicopter, Cessna Aircraft Company, Jacobsen, Kautex, E-Z-GO and Greenlee. On Dec 7, 2023, the company announced an agreement with ATP Flight School for the supply of an additional 40 Cessna Skyhawk aircraft beginning 2026. This should bolster TXT’s revenues in the coming years, once these jets have been delivered.
The company currently boasts a long-term earnings growth rate of 11.7%. The Zacks Consensus Estimate for Textron’s 2023 sales implies an improvement of 6.4% from the 2022 reported figure. TXT currently holds a Zacks Rank #2.
Price & Consensus: TXT
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3 Aerospace-Defense Stocks to Buy as Air Traffic Steadily Grows
The recent signing of the Defense Bill worth $886 billion by the U.S. President is expected to bode well for aerospace-defense companies that are primarily engaged in combat space. However, consistent supply-chain issues might lead to lower jet deliveries and thereby remain a threat to the industry players. Nevertheless, improved projections for air travel, as stated by the International Air Transport Association (IATA), are expected to bode well for companies that are engaged in commercial aerospace operations. The frontrunners in the aerospace-defense industry are Safran (SAFRY - Free Report) , Textron (TXT - Free Report) and Leidos Holdings (LDOS - Free Report) .
About the Industry
The Zacks Aerospace-Defense industry comprises of companies that primarily design and manufacture heavy-built products like commercial as well as military jets and helicopters, tankers and other combat vehicles, missiles, combatant ships as well as auxiliary ships, submarines, bombs, guns, space transportation vehicles, military satellites and a few more. The industry also includes cyber security players who offer information technology services and C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions. A portion of its revenues comes from defense contractors offering spare parts, aircraft modification, ship repair and overhaul services, and supply-chain management services.
4 Trends Shaping the Future of the Aerospace-Defense Industry
Improved Air Traffic Outlook Boosts Prospects: Recovering global air traffic data in recent times has boosted the near-term growth prospects of the industry. As stated in the latest report published by the IATA, industry-wide global RPK increased 40.1% year over year through September 2023, thereby reaching 92.9% of the traffic numbers seen in 2019. Looking ahead, IATA projects air passenger revenue growth of 38% year over year in 2023.Such impressive projections bode well for commercial aerospace manufacturers that have long borne the brunt of poor air travel in the form of delayed jet deliveries and, in some cases, cancellation of orders by airlines.
Expanding Defense Budget Remains a Growth Catalyst: While the commercial aerospace market has been recovering steadily over the past couple of quarters, the defense side of the industry stood its ground amid the COVID-19 crisis, cushioned by steady government support. To this end, it is imperative to mention that in December 2023, U.S. President Joe Biden signed the U.S. defense policy bill that authorizes a record $886 billion in annual military spending, thereby increasing the nation's total national security budget by about 3%. Such improved budgetary provisions set the stage for industry players focused on the defense business to win more contracts, which is likely to boost their top line.
Supply-Chain Issues May Hurt: Significant supply-chain disruption impacted the Aerospace and Defense industry, thanks to the pandemic-induced lower aircraft demand and restrictions on the movement of people and goods. This primarily affected small suppliers like aircraft part manufacturers, especially those with heavy exposure to commercial aerospace, and the aftermarket business. Although the global economy has started to improve, supply-chain issues are expected to continue to keep aircraft deliveries in 2023 lower than the 2019 level, as estimated by IATA. This, in turn, might constrict the growth trajectory of the U.S. Aerospace and Defense industry, to some extent, in the near term.
Strengthening Dollar Adds to Industry Woes: The recently appreciating U.S. dollar is adding another layer of cost to airlines that are already burdened with high inflation and rising jet fuel prices. The Federal Reserve’s policy rate now stands in the 5.25-5.50% range as of September 2023, having started at 0.25% in 2022. All U.S. dollar-denominated costs are rising for airlines that earn revenues in non-U.S. currency. Similarly, the debt burden has increased for all non-dollar-based entities that have borrowed in dollars. Such a burden on airlines might lead to lower aircraft delivery, thereby hurting aerospace-defense industry players that particularly operate in the commercial aerospace.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Aerospace-Defense industry is housed within the broader Zacks Aerospace sector. It currently carries a Zacks Industry Rank #46, which places it in the top 18% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few aerospace-defense stocks that you may want to add to your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Aerospace-Defense industry has underperformed the Zacks S&P 500 Composite as well as its own sector over the past year. The stocks in this industry have collectively lost 6.3% compared with the Aerospace sector’s decline of 1.5%. The Zacks S&P 500 Composite has gone up 24.9% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month EV/Sales ratio, which is used for evaluating capital-intensive stocks like aerospace-defense, the industry is currently trading at 2.22 compared with the S&P 500’s 3.72 and the sector’s 2.29.
Over the past five years, the industry has traded as high as 3.08X, as low as 1.49X and at the median of 2.39X, as the charts show below.
EV-Sales Ratio TTM
3 Aerospace-Defense Stocks to Keep in Your Portfolio
Leidos Holdings: Based in Reston, VA, Leidos is a global science and technology leader that serves the defense, intelligence, civil and health markets. Its core capabilities include providing solutions in the fields of cybersecurity; data analytics; enterprise IT modernization; operations and logistics; sensors, collection and phenomenology; software development; and systems engineering. On Dec 21, 2023, Leidos announced the delivery of the first Enduring Shield launchers. The Enduring Shield program supports the U.S. Army’s Indirect Fire Protection Capability Increment 2 (IFPC Inc 2) program, which is a critical part of the Department of Defense’s layered defense strategy.
The Zacks Consensus Estimate for the company’s 2023 sales implies an improvement of 5.9% from the 2022 reported figure. LDOS boasts a long-term earnings growth rate of 8.1%. It currently carries a Zacks Rank #2 (Buy).
Price & Consensus: LDOS
Safran: Based in France, Safran produces aircraft and rocket engines and propulsion systems. On Dec 6, 2023, the company signed a framework agreement with the Moroccan government, outlining a mutual commitment to support and develop Morocco’s aerospace industry ecosystem. This would strengthen Safran’s footprint in the global aerospace-defense space.
Safran currently boasts a long-term earnings growth rate of 34.3%. The Zacks Consensus Estimate for the company’s 2023 sales implies an improvement of 37.3% from the 2022 reported figure. SAFRY currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: SAFRY
Textron: Based in Providence, RI, Textron is a global multi-industry company that manufactures aircraft, automotive engine components and industrial tools. The company is known globally for its most recognizable and valuable brand names, such as Bell Helicopter, Cessna Aircraft Company, Jacobsen, Kautex, E-Z-GO and Greenlee. On Dec 7, 2023, the company announced an agreement with ATP Flight School for the supply of an additional 40 Cessna Skyhawk aircraft beginning 2026. This should bolster TXT’s revenues in the coming years, once these jets have been delivered.
The company currently boasts a long-term earnings growth rate of 11.7%. The Zacks Consensus Estimate for Textron’s 2023 sales implies an improvement of 6.4% from the 2022 reported figure. TXT currently holds a Zacks Rank #2.
Price & Consensus: TXT