On August 8, J.P. Morgan released a report that presented opportunities for investors despite heightened tensions regarding the trade war. Top analyst, Seth Seifman, writes, “Defense is a haven again. Defense stocks have outperformed recently due in part to their relative immunity to macroeconomic risks, including China trade, falling interest rates and currency fluctuation.”
Amid all the economic uncertainty, defense and aerospace stocks have generally held up. For example, Raytheon Company (RTN) gained 4% in the last five days and Leidos Holdings, Inc. (LDOS) is up 1.5% over the same time period.
Using TipRanks, we found 3 stocks in the defense and aerospace sector that analysts believe represent compelling investment opportunities.
Huntington Ingalls Industries (HII)
The first stock on our list is military shipbuilding company, Huntington Ingalls. Despite its underperformance at the beginning of 2019, Seifman believes HII has pulled off a turnaround.
“The stock has recovered from other earnings disappointments this year, and with the long-term outlook little changed, risk-reward looks attractive,” he wrote in the report.
HII has a backlog of contracts worth $40 billion, assuming all the contracts are executed. The company is also expecting to get a boost from the Navy’s increased need for unmanned undersea vehicles. “Overall, we think unmanned space is going to fundamentally change the Navy going forward. The intent to try to make ships more lethal, from the Navy standpoint, is something we’re paying closer attention to,” CEO Mike Petters said on August 1.
Investors got good news that same day when HII announced that its John F. Kennedy aircraft carrier would launch later this year, several months ahead of schedule.
Alembic Global analyst, Peter Skibitski, agrees that despite a lackluster performance in Q2, HII represents a compelling investment opportunity. On August 5, he upgraded the stock to a Buy stating, “The stock's pullback following the company's Q2 report an opportunity for investors.” Skibitski boasts an 82% success rate and gets an average return of 19% per rating.
Five-star analyst, Robert Spingarn, thinks that HII’s long-term growth narrative remains unchanged. On August 2, he reiterated his Buy rating and lowered the price target from $252 to $241. Despite the price target cut, Spingarn believes share prices could surge by 15% over the next twelve months. The Credit Suisse analyst has a 70% success rate and a 17% average return per rating.
The rest of the Street is bullish on this defense stock. HII has a ‘Strong Buy’ analyst consensus and a $246 average price target, suggesting 17% upside potential.
Boeing Company (BA)
While Boeing is widely known for its commercial airplanes, a substantial portion of its revenue is generated from the defense and space segments of the business.
On July 23, the company reported that its defense and space programs reached $6.6 billion, up 8% year-over-year. Management pointed to higher volume across derivative aircraft, satellites and weapons as the reason for the gain. An increase on sale of property and lower cost growth on the KC-46 Tanker program drove the operating margin expansion of 850 basis points or 15% year-over-year.
BA’s legacy fighter jets such as the F/A-18 and F-15 are still in production and are constantly being updated. It’s building the MQ-25 Stingray aerial-refueling drone as well as the P-8 Poseidon maritime surveillance aircraft for the Navy and the KC-46 refueling tanker for the Air Force.
The company has also made significant investments in its space programs with its Crew Space Transportation-100 Starliner that will ferry astronauts to the International Space Station. Its Space Launch System is expected to be the most powerful rocket in history.
Top analyst, Andrew Gollan, believes that the noise from past controversies is fading into the background. On August 6, he reiterated his Buy rating and lowered his price target from $415 to $400. Even with the price drop, Gollan thinks share prices could jump 19% over the next twelve months.
Another analyst, Robert Stallard, reiterated his Buy rating and $413 price target on BA after the better than expected Q2 results. The Vertical Research analyst believes share prices could gain 22% over the next twelve months. “The 777X news is not wholly unexpected given the reported issues with the GE9X, but we think getting the plane certified for delivery less than one year after first flight is very optimistic,” he added on July 24. Stallard has a 68% success rate and gets an average return of 10% per rating.
The Street is also bullish on BA. It has a ‘Strong Buy’ analyst consensus and a $432 average price target, suggesting 28% upside.
TransDigm Group Inc. (TDG)
The last stock on our list takes on more of a background role, producing less exciting aerospace components such as valves, actuators and pumps. However, analysts tell investors not to underestimate TDG. It’s up 60% year-to-date, with more growth expected to come.
Over the last four quarters, TDG has surpassed consensus estimates for EPS. On August 6, the company was able beat expectations for both EPS and revenue. EPS was $4.95, exceeding the $4.31 estimate and up from $4.01 in the prior-year quarter. Quarterly revenue reached $1.7 billion, beating the consensus estimate by 5%.
Management attributes this growth to its $4 billion acquisition of Esterline Technologies, a specialized components maker. Esterline produces parts for much of the commercial sector and for the Lockheed Martin (LMT) F-35.
Investors got more good news when the company stated there would be a special cash dividend of $30 per share.
UBS analyst, Myles Walton, thinks the aerospace stock is ready to soar. “We like TransDigm after its earnings beat and organic revenue growth in Q3, along with the expansion of its Esterline margins coming 2 years ahead of pace. TDG still has a strong liquidity profile even after the payout of a special dividend,” he said. On August 7, he reiterated his Buy rating and raised the price target from $565 to $605, suggesting 11% upside. The five-star analyst has a 71% success rate and a 15% average return per rating.
Spingarn, who also covers TDG, agrees that the stock offers investors a unique opportunity as ESL integration has been better than expected. On August 7, he reiterated a Buy rating while raising his price target from $539 to $617. The analyst believes share prices could increase by 13% over the next twelve months.
TDG has a ‘Strong Buy’ analyst consensus and a $579 average price target, implying 6% upside potential.