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3 Defense Equipment Stocks to Buy Amid Improved Air Traffic View

·7-min read

Recovery in revenue per kilometer is expected to gather pace in 2022, thereby boosting prospects of aerospace-defense equipment stocks. Also, airline financial performance in North America is expected to return to profitability in 2022. Moreover, frequent mergers and acquisitions tend to boost revenue generation prospects along with the production efficiency of the industry players. However, COVID-led supply chain disruption might result in lower earnings and cash flows for the industry. Nevertheless, the ongoing feud between Russia and Ukraine is expected to boost investment in the industry. Some key players in this industry include TransDigm Group TDG, Curtiss-Wright CW and Ducommun DCO.

About the Industry

The Zacks Aerospace-Defense Equipment industry comprises firms that manufacture a wide variety of vital components for the aerospace-defense space, ranging from aerostructures, space shuttles, propulsion systems, aircraft engines, defense electronics, missile and radar systems to flight test equipment, structural adhesives, instrumentation and control systems, communication products and many more. A few of these companies also offer integrated simulation and training services to the U.S. defense force. While the majority of the revenues is generated from the production of the aforementioned accompaniments, the industry players also generate revenues by providing notable aftermarket support and services like maintenance, repair and overhaul activities to aerospace and defense players.

4 Trends Shaping the Future of the Aerospace-Defense Equipment Industry

New M&As Instill Hopes: Rising competition has historically prompted industry majors to expand their product lines through small and medium-sized mergers and acquisitions (M&As) besides the big mergers witnessed in the industry. In May 2022, TransDigm Group completed the acquisition of aviation aftermarket components manufacturer Dart Aerospace for $360 million. The transaction is expected to boost TransDigm’s portfolio with a diverse range of new and existing rotary-wing platforms as well as strong aftermarket content. Such consolidations should improve economies of scale for the industry as a whole, with the industry players having access to such diversified business models.

Recovering Air Traffic View Boosts Prospects: World air travel data, which dwindled at the onset of 2022, thanks to the sporadic outbreak of the Omicron variant, has regained its growth trajectory in the past few months. Per the latest global outlook published by the International Air Transport Association (IATA) in June 2022, recovery in industry revenue per kilometer is expected to gather pace this year as vaccine rollouts continue, travel restrictions are lifted, and more routes are re-opened.  Moreover, airline financial performance is expected to improve in all regions in 2022, with North America being the only region expected to return to profitability this year. This surely makes us optimistic about the near-term growth prospects of aerospace-defense equipment industry stocks, especially those engaged in commercial aviation.

Socio-Political Uncertainty to Aid: Widespread geopolitical as well as socio-economic tensions have been a growth driver for the aerospace and defense equipment industry for decades. In recent times, escalating international terrorist attacks along with civil wars like the ones in the Middle East have been boosting the prospects of this space. In particular, U.S. defense contractors’ prospects in this region remain high, thanks to the constant military conflict that has been taking place between Israel and Syria for quite some time now. Moreover, the latest feud that erupted after Russia attacked Ukraine and the United States’ strong opposition to this hostile action of Russia boosted the prospects of America’s defense companies. Such geopolitical tensions are expected to be beneficial for the aerospace-defense equipment industry.

Supply Chain Disruption Poses Risk: The COVID-19 pandemic has led to an unprecedented crisis in the aerospace and defense (A&D) supply chain. Original Equipment Manufacturers (OEMs) need to dramatically scale back their capacity to reflect the new realities of the commercial air travel market. Such OEM rate reductions have been affecting the extended commercial aerospace manufacturing supply chain, which might result in lower earnings and cash flows for the aerospace and defense equipment industry in the near term.

Zacks Industry Rank Reflects Bright Outlook

The Zacks Aerospace-Defense Equipment industry is housed within the broader Zacks Aerospace sector. It currently carries a Zacks Industry Rank #89, which places it in the top 36% 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 encouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top% of the Zacks-ranked industries is due to a positive earnings outlook for the constituent companies in aggregate.
Looking at the aggregate earnings estimate revisions, it appears that analysts have gained confidence in this group’s earnings growth potential over the past few months. Evidently, the industry’s earnings estimate for the current fiscal year has gone up 0.8% to $3.76 since April 2022.

Before we present a few aerospace-defense equipment 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 Beats S&P 500 & Sector

The Aerospace-Defense Equipment industry has outperformed the Zacks S&P 500 composite as well as its own sector over the past year. The stocks in this industry have collectively lost  3.4% while the Aerospace sector declined of 21.7%. The Zacks S&P 500 composite has dropped 11.5% in the same timeframe.

One-Year Price Performance

Industry's Current Valuation

On the basis of trailing 12-month EV/Sales, which is used for valuing capital intensive stocks like aerospace-defense equipment, the industry is currently trading at 2.42X compared with the S&P 500’s 3.27X and the sector’s 2.16X.

Over the past five years, the industry has traded as high as 2.75X, as low as 2.28X, and at the median of 2.49X, as the charts show below.

EV-Sales Ratio TTM



3 Aerospace-Defense Equipment Stocks to Buy

Ducommun: Based in Santa Ana, CA, Ducommun manufactures components and assemblies principally for domestic and foreign commercial and military aircraft and space programs. In May 2022, the company reported its first-quarter 2022 results, wherein its revenues rose 4% year over year, while adjusted earnings per share improved by a penny.

The Zacks Consensus Estimate for Ducommun’s 2022 earnings indicates a 25.9% improvement from 2021’s reported figure, while that for sales projects an increase of 9%. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Price & Consensus: DCO


Transdigm Group: Based in Cleveland, OH, Transdigm Group’s diversified portfolio of highly engineered proprietary aerospace components enjoys solid demand in the aircraft market. In May 2022, the company reported its second-quarter fiscal 2022 results, wherein its net sales increased a solid 11% year over year, while adjusted earnings increased 50%.

The Zacks Consensus Estimate for TDG’s fiscal 2022 earnings implies an improvement of 37.1% from fiscal 2021’s reported figure. Its long-term earnings growth estimate is pegged at 24.3%. The company currently holds a Zacks Rank #2 (Buy).

Price & Consensus: TDG



Curtiss-Wright: Davidson, N.C.-based Curtiss-Wright provides highly engineered products and services for high-performance platforms and critical applications in key areas such as commercial aerospace and defense electronics, reactor coolant pumps for next-generation nuclear reactors as well as advanced surface treatment technologies. In May 2022, Curtiss-Wright announced a 6% hike in its quarterly dividend to 19 cents per share.

The Zacks Consensus Estimate for CW’s 2022 earnings suggests an annual improvement of 11.7%, while that for 2022 sales indicates an increase of 2.4%. The company currently has a Zacks Rank #2.

Price & Consensus: CW




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Transdigm Group Incorporated (TDG) : Free Stock Analysis Report
 
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Ducommun Incorporated (DCO) : Free Stock Analysis Report
 
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