Improving defense budget funding from the U.S. administration should bode well for aerospace-defense companies that are primarily engaged in the combat space. However, consistent supply-chain issues are expected to continue to adversely impact jet deliveries and thereby, remain a threat for the industry players.
Nevertheless, 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. The frontrunners in the aerospace-defense industry are Safran, Leidos Holdings and Textron.
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 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.
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 IATA, industry-wide global revenue-passenger kilometers (RPKs) increased a solid 11% year over year in April 2024 and continued to surpass the pre-COVID levels.
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. To this end, it is imperative to mention that in March 2024, the fiscal 2025 defense budget request was submitted by President 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 funding 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 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, the persisting supply-chain issues continue to be a challenge as it has been limiting the number of deliveries. To this end, as per ITAT's June 2024 report, the number of deliveries scheduled for 2024 dropped to 1,583 from 1,777 reported six months ago, implying 11% less capacity addition. 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 #91, which places it in the top 37% 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 8.3% against the Aerospace sector's growth of 0.8%. The Zacks S&P 500 composite has gone up 26% in the said time frame.
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 2.19 compared with the S&P 500's 3.82 and the sector's 2.34.
Over the past five years, the industry has traded as high as 2.34X, as low as 1.89X and at the median of 2.20X.
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, and systems engineering.
On May 7, 2024, Leidos announced that it has received a contract worth $631 million for the Development, Integration, Acquisitions, Bridging to Logistics & Operations (DIABLO) program from the U.S. Army Contracting Command – Aberdeen Proving Grounds. This contract positions the company as a leading mission equipment provider to the U.S. Army for the next 10 years.
The Zacks Consensus Estimate for the company's 2024 sales implies an improvement of 4.1% from the 2023 reported figure. LDOS boasts a long-term earnings growth rate of 11.1%. It currently sports a Zacks Rank #1 (Strong Buy).
Safran: Based in France, Safran produces aircraft and rocket engines and propulsion systems. On May 28, 2024, the company announced that its Aneto-1K helicopter engine has received certification from the Civil Aviation Administration of China (CAAC). This might lead to increased order flow for SAFRY's Aneto-1K engines from China's civil aviation market.
Safran currently boasts a long-term earnings growth rate of 34.7%. The Zacks Consensus Estimate for the company's 2024 sales implies an improvement of 42.9% from the 2023 reported figure. SAFRY currently carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
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 May 28, 2024, Textron announced that its 400th Cessna Citation Latitude business jet has rolled out of production at the company's factory in Wichita, KS, and is expected to be delivered later this year. This reflects the solid demand that TXT's Citation family jet enjoys in the business jet market.
The company currently boasts a long-term earnings growth rate of 10.1%. The Zacks Consensus Estimate for Textron's 2024 sales implies an improvement of 5.6% from the 2023 reported figure. TXT currently carries a Zacks Rank #3 (Hold).
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