How to play the defense space now: The Playbook

Ongoing geopolitical conflicts continue to escalate in Europe and the Middle East, causing defense budgets for certain countries to increase. With that increase, comes defense spending, but which companies can best capitalize on this momentum?

Citi managing director, aerospace and defense lead analyst Jason Gursky joins Market Domination to give insight into the defense sector and what investors need to know about the current environment.

Gursky explains the defense sector is doing well as governments look to bolster and modernize their defenses as ongoing geopolitical conflicts escalate: "Military modernization is the way to deter our potential enemies, and that's what we're seeing today. We're seeing rising budgets and the modernization of a lot of military kit."

He provides one of his lesser known picks for the industry: "TransDigm (TDG) is a bit more of a commercial aerospace company. They do provide quite a bit of parts that go into the defense industry, but I think most investors like that one because of its exposure to, the airline industry and by those that are buying new aircraft and, and servicing those aircraft. They have also been a serial acquirer rolling up a pretty fragmented industry."

Watch the video above to hear why Gursky also likes Ducommun (DCO).

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video transcript

As the world grapples with escalating geopolitical tensions, defense giants like Lockheed Martin, RT X and Northrop Grumman have not just survived but thrived.

And with just a few minutes left in the, until the closing bell rings on Wall Street, we're looking at how to navigate the defense sector with the Yahoo Finance playbook.

Joining us now, Jason City managing director and lead analyst covering aerospace and defense.

So Jason, first of all, sort of set the table for us about the defense environment now uh versus other eras.

Um and whether you think as a whole, this is a good area to, to buy right now.

Yeah, I'm constructive uh on the outlook for uh the defense industry.

Uh geopolitical tensions are elevated as we all know, we have uh active conflicts going on in Europe and the Middle East.

And you have uh this um you know, long term uh kind of detente or cold war that was potentially developing here between the United States and China.

Uh So as you know, the United States looks at the threat environment and prepares a strategy to kind of address that they look to deterrence is the number one thing that they want to invest in and, uh, military modernization is the way to, uh, to deter our potential enemies.

Um And that's what we're seeing today.

Uh, we're seeing, you know, rising budgets and the modernization of a lot of military kit.

Um, additionally, given the support that we've given Ukraine and Israel, we're also needing to, um, you know, replace munitions that have been expended in those conflicts.

We've got, you know, things going on here in the near term with active conflicts and munitions replacements and, and restocking.

Um, and then the long term investments that we're making uh to deter potential enemies uh over the longer term, you know, Jason, I'm curious, we, we had Trey Stevens on the show recently from defense uh tech start up and, you know, there's a start up, Jason now valued at 14 billion.

I, I'm just curious how much of a competitive threat you think these defense tech start ups like neander rules of the world are Jason to the, you know, just the big entrenched traditional military suppliers you cover.

Yeah.

Look, I think companies like Inderal are a really healthy thing for uh the ecosystem.

You know, they are demonstrating uh inability to bring innovation to the table to iterate quickly on innovation.

That's not to say that the big guys aren't doing something similar.

They all have, um, you know, venture arms, they're investing in uh smaller companies that are helping them uh to innovate uh as well.

Um To your point though, this is a, it is maybe a bit of a zero sum game in the sense that, you know, defense budgets are what they are, their size, the way that they are and, and for uh companies like and all to, to generate new revenue streams, not necessarily growing the t the addressable market, they're just taking, they're gonna end up taking share.

So, um look, this is, it's a healthy dynamic for the taxpayers.

It's a healthy environment uh uh for, for investors as well to see this competitive tension going on uh between the likes of Andre and some of the big guys.

But um there's a, it's a big pie that's growing and I think that there's probably gonna be room for everybody to be pretty healthy in this city environment and, and Jason, when, when it comes to the stocks that you're recommending for investors here are struck, not just by the sort of Lockheed and general dynamics, the really big guys that you, that you like, but you also like some lesser known names that are more part suppliers to those bigger players.

I'm looking at a Trans dime for example, or a a DUAM um which was not a name I knew to be Frank.

So why do you like?

Why do you like some of those guys?

Yeah, trans is a bit more of a commercial aerospace company.

They do provide, you know, quite a bit of parts that go into the defense industry.

But I think most investors like that one because of its exposure to uh the airline industry and buy those that are buying new aircraft and um and servicing those aircraft, there have also been a serial acquirer rolling up a pretty fragmented industry.

Uh So our thesis there is all the good goodness that's going on in commercial aerospace and this fragmented industry that they have the opportunity to go roll up do common.

Uh and, and, and transit will also benefit from some of the dynamics that are going on in defense.

But that's not the most important part of the story do common.

Um It's a kind of a split aerospace and defense company, part supplier.

They've been going through some restructuring efforts to help uh reduce their cost structure, which gives them a path I think to higher margins uh over time and uh they are exposed to some of the missile programs.

I talked early on about the restocking of a bunch of munitions that have been used in both Ukraine and uh in the Middle East.

Um The the customers that they have on hand there, you know, the, the Raytheon's in particular of the world are gonna see uh a restock restocking going on of all these munitions and growth and dumb is gonna be directly exposed to that.

So that's why we reconstructive on that one.

Jason great to have you on the show today.

Thanks so much for your time and those stock picks.

You're welcome.