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4 Aerospace and Defense Companies to Consider Following Saudi Oil Attack

Shares of aerospace and defense companies rose on Monday morning after President Donald Trump tweeted Sunday evening that the U.S. is "locked and loaded" in response to drone attacks on oil installations in Saudi Arabia.

CNBC reported that half of the Middle Eastern country's oil production was halted when huge fires broke out after attacks by as many as 10 aerial drones. While Yemen's Houthi rebels claim responsibility, U.S. Secretary of State Mike Pompeo accused Iran of launching "an unprecedented attack" on the energy supply and said there is "no evidence" the attacks originated from Yemen.


While the broader stock market declined, L3Harris Technologies Inc. (NYSE:LHX) and Raytheon (NYSE:RTN) led the charge in the aerospace and defense sector with their shares up around 2% each Monday morning. In contrast, shares of sector leaders Boeing Co. (NYSE:BA) and United Technologies Corp. (NYSE:UTX) declined. The GuruFocus Industry Overview page shows the composition of the sector:

As a result of these events, value opportunities may be found among aerospace and defense companies that outperformed the Standard & Poor's 500 Index by at least 18% over the last six months. As of Sept. 16, the GuruFocus All-in-One Screener found several stocks that have a market cap over $5 billion and had a higher return relative to the index for the period. It also looked for companies with a business predictability rank of at least two out of five stars.

Stocks that met these criteria were TransDigm Group Inc. (NYSE:TDG), Heico Corp. (NYSE:HEI), Lockheed Martin Corp. (NYSE:LMT) and Northrop Grumman Corp. (NYSE:NOC). The S&P 500 has posted a return of roughly 19.37% so far this year.

TransDigm Group

Outperforming the index by approximately 18.38% over the past six months, TransDigm has a $27.73 billion market cap; its shares were trading around $519.48 on Monday with a price-earnings ratio of 38.99 and a price-sales ratio of 5.96.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.

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The Cleveland, Ohio-based company, which manufactures commercial and military aerospace components like mechanical actuator and ignition systems, has a GuruFocus financial strength rating of 3.5 out of 10. As a result of issuing approximately $6.5 billion in new long-term debt over the past three years, TransDigm has low interest coverage. The weak Altman Z-Score of 1.63 also wants the company is in financial distress and could be at risk of going bankrupt.

TransDigm's profitability and growth scored an 8 out of 10 rating on the back of an expanding operating margin, strong returns that outperform over half of competitors, consistent earnings and revenue growth and a moderate Piotroski F-Score of 5, which suggests operations are stable. It also has a perfect five-star business predictability rank. According to GuruFocus, companies with this rank typically see their stocks gain an average of 12.1% per annum over a 10-year period.

Of the gurus invested in TransDigm, Chase Coleman (Trades, Portfolio) has the largest stake with 3.87% of outstanding shares. Other top guru investors include Steve Mandel (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Ron Baron (Trades, Portfolio), Frank Sands (Trades, Portfolio), Wallace Weitz (Trades, Portfolio), Alan Fournier (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and Caxton Associates (Trades, Portfolio).

Heico

Beating the benchmark by around 29.39% over the past six months, Heico has a market cap of $14.82 billion; its shares were trading around $127.24 on Monday with a price-earnings ratio of 43.73, a price-book ratio of 8.46 and a price-sales ratio of 6.84.

According to the Peter Lynch chart, the stock is overvalued.

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Headquartered in Hollywood, Florida, the company, whose products are found in aircraft, spacecraft, defense equipment, medical equipment and telecommunications systems, has a GuruFocus financial strength rating of 6.6 out of 10. Despite issuing approximately 121.12 million in new long-term debt over the past three years, Heico's debt is at a manageable level due to comfortable interest coverage. In addition, the robust Altman Z-Score of 8.67 indicates the company is in good financial health.

Heico's profitability and growth scored an 8 out of 10 rating, driven by operating margin expansion, strong returns that outperform industry peers, steady earnings and revenue growth and a high Piotroski F-Score of 7, which suggests business conditions are healthy. The company also has a five-star business predictability rank.

With 1.18% of outstanding shares, Ken Fisher (Trades, Portfolio) is the company's largest guru shareholder. Chuck Royce (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Baron, Pioneer, Joel Greenblatt (Trades, Portfolio), Caxton and Mairs and Power (Trades, Portfolio) also own the stock.

Lockheed Martin

Having outperformed the S&P 500 by roughly 21.68% over the past six months, Lockheed Martin has a $109.95 billion market cap; its shares were trading around $390.16 on Monday with a price-earnings ratio of 18.98, a price-book ratio of 38.6 and a price-sales ratio of 1.93.

Based on the Peter Lynch chart, the stock appears to be overvalued.

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The Bethesda, Maryland-based aerospace and defense company's financial strength was rated 5.1 out of 10 by GuruFocus. In addition to adequate interest coverage, Lockheed Martin is supported by a high Altman Z-Score of 3.72, which suggests it is in good financial standing.

Lockheed Martin's profitability and growth fared much better, scoring a 9 out of 10 rating on the back of an expanding operating margin, strong returns that outperform the majority of competitors, stable revenue and earnings growth, a high Piotroski F-Score of 9 and a four-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 9.8% per year.

Ken Heebner (Trades, Portfolio) is the company's largest guru shareholder with 0.04% of outstanding shares. Other top guru investors include Greenblatt, Jeremy Grantham (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Pioneer, Caxton, John Rogers (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, Paul Tudor Jones (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Scott Black (Trades, Portfolio), Fisher, Gabelli, First Pacific Advisors (Trades, Portfolio), Dodge & Cox, Murray Stahl (Trades, Portfolio) and Mairs and Power (Trades, Portfolio).

Northrop Grumman

Outperforming the index by approximately 24.62% over the past six months, Northrop Grumman has a $62.76 billion market cap; its shares were trading around $370.51 on Monday with a price-earnings ratio of 18.13, a price-book ratio of 6.87 and a price-sales ratio of 1.93.

The Peter Lynch chart suggests the stock is overpriced.

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GuruFocus rated the financial strength of the weapons manufacturer and military technology provider, which is headquartered in Falls Church, Virginia, 5 out of 10. While it has sufficient interest coverage, the Altman Z-Score of 2.82 indicates Northrop Grumman is under some financial pressure.

Northrop Grumman's profitability and growth scored an 8 out of 10 rating, driven by strong margins and returns that outperform industry peers, predictable earnings and revenue growth, a moderate Piotroski F-Score of 6 and a two-star business predictability rank. According to GuruFocus, companies with this rank typically see their stocks gain an average of 6% per year.

Holding 0.06% of outstanding shares, Bacon is the company's largest guru shareholder. Steve Cohen, Heebner, the T Rowe Price Equity Income Fund (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Pioneer, Gabelli, First Pacific, Fisher, Stahl and Mairs and Power (Trades, Portfolio) also have positions in the stock.

Disclosure: No positions.

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This article first appeared on GuruFocus.