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3 Aerospace-Defense Stocks to Buy Amid Solid US Defense Budget
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Impressive year-over-year projections for global air passenger numbers can be expected to boost companies in the aerospace defense industry, particularly those that operate in commercial aerospace. However, consistent supply-chain issues are expected to continue to adversely impact jet deliveries and, thereby, remain a threat to the industry players. Nevertheless, improving defense budget funding from the U.S. administration should bode well for aerospace-defense companies that are primarily engaged in the combat space. The frontrunners in the aerospace-defense industry are Leidos Holdings (LDOS - Free Report) , Virgin Galactic (SPCE - Free Report) and AIR Industries group (AIRI - Free Report) .
About the Industry
The Zacks Aerospace-Defense industry comprises 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 that 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.
3 Trends Shaping the Future of the Aerospace-Defense Industry
Improved Air Traffic Outlook Boosts Prospects: Steadily improving global air traffic data in recent times has been boosting the near-term growth prospects of the industry. As stated in the latest report published by the International Air Transport Association (IATA), industry-wide global revenue-passenger kilometers (RPKs) increased a solid 8% year over year in July 2024.
Looking ahead, IATA projects the number of global air passengers to grow 10.4% in 2024 from the 2023 level (as per IATA’s latest outlook published in June 2024). 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. In March 2024, the fiscal 2025 defense budget request was submitted by U.S. President Joe Biden. This included a funding proposal of $849.8 billion for the U.S. Department of Defense (DoD), which reflected a 1% increase from the fiscal 2024 enacted amount. 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 disruptions adversely 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 been improving, the persisting supply-chain issues continue to be a challenge as it has been limiting the number of deliveries. In its June 2024 report, the IATA stated that an inventory of 38.7 million flights is expected to be available in 2024. This reflects a decline of 1.4 million flights from its previous estimate made in December 2023. This decline can be largely attributed to the slowing pace of deliveries in the face of persistent supply-chain issues in the aerospace sector. This, in turn, might constrict the growth trajectory of the U.S. Aerospace and Defense industry to some extent in the near term.
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 #50, which places it in the top 20% 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 1.1% against the Aerospace sector’s growth of 6.7%. 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 2.37 compared with the S&P 500’s 5.30 and the sector’s 2.51.
Over the past five years, the industry has traded as high as 2.40X, as low as 1.95X and at the median of 2.24X, as the charts show below.
EV-Sales Ratio TTM
3 Aerospace-Defense Stocks to Keep in Your Portfolio
AIRI Industries Group: Based in New York, AIR Industries is engaged in designing and manufacturing flight critical products, including flight safety parts, landing gear and components, arresting gear, flight controls, sheet metal fabrications and ground support equipment. On Aug. 14, 2024, the company released its second-quarter 2024 results. Its net sales improved a solid 2.8% year over year. Operating income surged a massive 944.4%.
The Zacks Consensus Estimate for the company’s 2024 sales implies an improvement of 7.1% from the 2023 reported figure. The stock boasts a four-quarter average earnings surprise of 8.88%. It currently sports a Zacks Rank #1 (Strong Buy).
Price & Consensus: AIRI
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 and systems engineering. On Aug. 27, 2024, the company announced that it has secured a Missile Warning/Missile Track Enhancement (MW/MT) contract to provide mission software and technology-enabled services for enhancing missile warning capabilities. Such contract wins should boost Leidos’ backlog and, thereby, revenue generation prospects.
The Zacks Consensus Estimate for the company’s 2024 sales implies an improvement of 5.4% from the 2023 reported figure. LDOS boasts a long-term earnings growth rate of 12.5%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: LDOS
Virgin Galactic: Based in California, Virgin Galactic is an aerospace company pioneering human spaceflight for private individuals and researchers. On Aug. 7, 2024, the company announced its second-quarter 2024 results. Its revenues improved 100% year over year, driven by commercial spaceflight and membership fees related to future astronauts.
Virgin Galactic boasts a four-quarter average earnings surprise of 18.28%. The Zacks Consensus Estimate for the company’s 2024 earnings improved over the past 60 days. SPCE currently carries a Zacks Rank #2.
Price & Consensus: SPCE
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3 Aerospace-Defense Stocks to Buy Amid Solid US Defense Budget
Impressive year-over-year projections for global air passenger numbers can be expected to boost companies in the aerospace defense industry, particularly those that operate in commercial aerospace. However, consistent supply-chain issues are expected to continue to adversely impact jet deliveries and, thereby, remain a threat to the industry players.
Nevertheless, improving defense budget funding from the U.S. administration should bode well for aerospace-defense companies that are primarily engaged in the combat space. The frontrunners in the aerospace-defense industry are Leidos Holdings (LDOS - Free Report) , Virgin Galactic (SPCE - Free Report) and AIR Industries group (AIRI - Free Report) .
About the Industry
The Zacks Aerospace-Defense industry comprises 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 that 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.
3 Trends Shaping the Future of the Aerospace-Defense Industry
Improved Air Traffic Outlook Boosts Prospects: Steadily improving global air traffic data in recent times has been boosting the near-term growth prospects of the industry. As stated in the latest report published by the International Air Transport Association (IATA), industry-wide global revenue-passenger kilometers (RPKs) increased a solid 8% year over year in July 2024.
Looking ahead, IATA projects the number of global air passengers to grow 10.4% in 2024 from the 2023 level (as per IATA’s latest outlook published in June 2024). 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.
In March 2024, the fiscal 2025 defense budget request was submitted by U.S. President Joe Biden. This included a funding proposal of $849.8 billion for the U.S. Department of Defense (DoD), which reflected a 1% increase from the fiscal 2024 enacted amount. 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 disruptions adversely 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 been improving, the persisting supply-chain issues continue to be a challenge as it has been limiting the number of deliveries. In its June 2024 report, the IATA stated that an inventory of 38.7 million flights is expected to be available in 2024. This reflects a decline of 1.4 million flights from its previous estimate made in December 2023. This decline can be largely attributed to the slowing pace of deliveries in the face of persistent supply-chain issues in the aerospace sector. This, in turn, might constrict the growth trajectory of the U.S. Aerospace and Defense industry to some extent in the near term.
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 #50, which places it in the top 20% 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 1.1% against the Aerospace sector’s growth of 6.7%. 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 2.37 compared with the S&P 500’s 5.30 and the sector’s 2.51.
Over the past five years, the industry has traded as high as 2.40X, as low as 1.95X and at the median of 2.24X, as the charts show below.
EV-Sales Ratio TTM
3 Aerospace-Defense Stocks to Keep in Your Portfolio
AIRI Industries Group: Based in New York, AIR Industries is engaged in designing and manufacturing flight critical products, including flight safety parts, landing gear and components, arresting gear, flight controls, sheet metal fabrications and ground support equipment. On Aug. 14, 2024, the company released its second-quarter 2024 results. Its net sales improved a solid 2.8% year over year. Operating income surged a massive 944.4%.
The Zacks Consensus Estimate for the company’s 2024 sales implies an improvement of 7.1% from the 2023 reported figure. The stock boasts a four-quarter average earnings surprise of 8.88%. It currently sports a Zacks Rank #1 (Strong Buy).
Price & Consensus: AIRI
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 and systems engineering. On Aug. 27, 2024, the company announced that it has secured a Missile Warning/Missile Track Enhancement (MW/MT) contract to provide mission software and technology-enabled services for enhancing missile warning capabilities. Such contract wins should boost Leidos’ backlog and, thereby, revenue generation prospects.
The Zacks Consensus Estimate for the company’s 2024 sales implies an improvement of 5.4% from the 2023 reported figure. LDOS boasts a long-term earnings growth rate of 12.5%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: LDOS
Virgin Galactic: Based in California, Virgin Galactic is an aerospace company pioneering human spaceflight for private individuals and researchers. On Aug. 7, 2024, the company announced its second-quarter 2024 results. Its revenues improved 100% year over year, driven by commercial spaceflight and membership fees related to future astronauts.
Virgin Galactic boasts a four-quarter average earnings surprise of 18.28%. The Zacks Consensus Estimate for the company’s 2024 earnings improved over the past 60 days. SPCE currently carries a Zacks Rank #2.
Price & Consensus: SPCE
