Impressive projections for global air passenger traffic bolster the growth prospects of the Zacks Aerospace-Defense Equipment industry stocks. However, persistent supply-chain issues plaguing commercial aerospace may cause delays in product deliveries, thereby negatively impacting the bottom line and cash flow performance of the industry players. Nevertheless, valuable mergers and acquisitions are projected to improve economies of scale for the concerned stocks, in addition to expanding and diversifying their product portfolio. Some key players from this industry that investors may add to their portfolio are TransDigm Group TDG, Heico Corp. HEI and Leonardo DRS DRS.
About the Industry
The Zacks Aerospace-Defense Equipment industry comprises firms that manufacture various 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. Some of these companies also offer integrated simulation and training services to the U.S. defense force. While the majority of the revenues are 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.
3 Trends Shaping the Future of the Aerospace-Defense Equipment Industry
New M&As Instill Hope: Rising competition has historically prompted industry majors to expand their product lines through valuable mergers and acquisitions (M&As). In July 2024, it was announced that jet giant Boeing has signed a contract to buy back Spirit AeroSystems, its largest independent supplier of aerostructures (which spun off from the jet maker in 2005), for a total price of $8.3 billion. Spirit AeroSystems offers a wide range of products like fuselage, nacelles, wing structures in commercial aerospace and military jet-related products like cockpit and cabin assembly.
In May 2024, TransDigm Group agreed to acquire Raptor Scientific for $655 million, a manufacturer of complex test and measurement solutions primarily serving the aerospace and defense end markets. Through this acquisition, TDG should be able to provide a wider range of products and gain a larger market share in the highly engineered aviation component industry. Such consolidations should improve economies of scale for the industry as a whole, with the players having access to diversified business models. This, in turn, should bolster their revenue growth.
Impressive Air Traffic View Boosts Prospects: World air travel data has been on a steady growth trajectory over the past few months, driven by pent-up passenger demand. Per a report published by the International Air Transport Association (IATA) in June 2024, the number of global air passengers is expected to witness a solid 10.4% year-over-year improvement in 2024, whereas revenue passenger kilometers (RPKs) growth is estimated to be 11.6%. Consequently, airline industry revenues are expected to reach a historic high of $996 billion in 2024, reflecting an annual 9.7% improvement. Such projections bode well for aerospace-defense equipment industry stocks, especially those engaged in commercial aviation.
Supply-Chain Disruption Poses Risk: The COVID-19-pandemic-driven supply-chain issues continue to impact global trades and businesses. Airlines have been directly affected by unforeseen maintenance issues on some aircraft/engine types, as well as delays in the delivery of aircraft parts and aircraft, thereby limiting capacity expansion and fleet renewal. To this end, IATA announced in its June 2024 report 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 was mainly due to the slowing pace of deliveries in the face of persistent supply-chain issues. This, in turn, may cause Original Equipment Manufacturers (OEMs) to scale down their production volume, resulting 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 #98, which places it in the top 39% 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 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 both the Zacks S&P 500 composite and its sector over the past year. The stocks in this industry have collectively surged 29.4% in a year, while the Aerospace sector has risen 4.5%. The Zacks S&P 500 composite has surged 22.6% in the same time frame.
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 6.46X compared with the S&P 500’s 5.11X and the sector’s 2.45X.
Over the past five years, the industry has traded as high as 6.82X, as low as 2.20X and at the median of 5.61X, as the charts show below.
EV-Sales Ratio TTM
3 Aerospace-Defense Equipment Stocks to Buy
TransDigm Group: Based in Cleveland, OH, TransDigm is a leading global designer, producer and supplier of highly engineered aerospace components that are used in commercial and military aircraft. On Aug 6, 2024, the company released its third quarter fiscal 2024 results. Its net sales improved a solid 17% year over year and net income surged 31%.
The Zacks Consensus Estimate for TDG’s fiscal 2024 sales implies an improvement of 19.4% from the previous year’s reported figure. The stock boasts a long-term earnings growth rate of 20%. It currently holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: TDG
Heico Corp.: Based in Hollywood, FL, Heico is one of the world’s leading manufacturers of FAA-approved jet engine and aircraft component replacement parts. On May 28, 2024, the company released its second-quarter fiscal 2024 results. Its net sales improved 39% year over year and its net income increased 20%.
The Zacks Consensus Estimate for HEI’s fiscal 2024 sales implies an improvement of 30.3% from the previous year’s reported figure. The stock boasts a long-term earnings growth rate of 19.1%. It currently holds a Zacks Rank #2.
Price & Consensus: HEI
Leonardo DRS: Based in Arlington, VA, Leonardo DRS develops and manufactures advanced defense products. The company's broad technology portfolio focuses on advanced sensing, network computing, force protection and electric power and propulsion as well as a range of key defense priorities. On Jul 31, 2024, the company announced that it won a contract, with a ceiling value worth more than $471 million, from the U.S. Navy to provide critical electronic combat control and sonar systems equipment for installation across the service’s fleet of submarines and allied fleets.
The Zacks Consensus Estimate for DRS’ 2024 sales indicates an 11.4% improvement from the previous year’s registered number. The stock boasts a long-term earnings growth rate of 16.4%. It currently holds a Zacks Rank #2.
Price & Consensus: DRS
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