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4 Defense Stocks to Buy on Higher Spending, Mergers

Ritujay Ghosh
Increased defense spending is making a larger number of contractors go for mergers so that they have more scale to bid on bigger projects.

On Oct 14, military communication equipment providers Harris Corporation HRS and L3 Technologies, Inc. LLL announced that they are combining in an all-stock merger to create the sixth-largest defense contractor in the United States. Understandably, this is in a move to get a bigger share of President Donald Trump’s increased military spending.

Higher military spending by the U.S. government is making a number of defense contractors go for mergers. Only last month, Trump signed a massive spending package for defense, providing $675 billion to fund military operations in fiscal 2019. Moreover, the defense sector has been performing well amid rising trade tensions. At the same time, rising global conflicts have seen a jump in arms sales. Given this scenario, it makes defense stocks must haves for your portfolio.

Harris, L3 Merger to Make it 6th-Largest Defense Contractor

On Oct 14, Harris and L3 Technologies announced an all-stock merger keeping with the trend of creating bigger companies in order to take advantage of Trump’s increased military spending. The newly formed L3 Harris Technologies will make it the sixth-largest defense contractor in the United States with a market cap of $34 billion.

Increased defense spending is making a larger number of contractors go for mergers so that they have more scale to bid on bigger projects. Moreover, this will also offer a greater competitive edge to the new entity, adding to a flurry of aerospace and defense deals. This comes amid higher military spending by the U.S. government and an increase in jetliner sales.

On Oct 10, TransDigm Group Incorporated TDG agreed to buy out Esterline Technologies Corporation ESL in a $3.6 billion deal. United Technologies Corporation UTX is also closing in to complete its acquisition of Rockwell Collins, Inc. COL for $23 billion.

Higher Defense Spending to Help Defense Sector

Only last month, Trump signed a huge spending bill for defense, allowing $675 billion to fund military operations in fiscal 2019 on purchase of weapons, aircraft, ships and paying troops. The bill is a $19.8 billion increase from fiscal 2018 and points at Trump’s increased focus on defense spending. Interestingly, this is the first time in a decade that the military received funding on time.

This is giving defense contractors more confidence to consolidate, as this will allow them to greater scale to bid on bigger projects. At the same time, it also proves the underlying strength in the defense sector, which is poised to perform well in the long term.

Our Choices

Higher defense spending is making an increasing number of contractors merge so that they can aim for bigger projects. Understandably, this is in a move to get a bigger share of President Donald Trump’s increased military spending.

This is why picking defense stocks looks like a smart option. However, picking winning stocks may be difficult. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

AeroVironment, Inc. AVAV operates through two segments: Unmanned Aircraft Systems and Efficient Energy Systems.

AeroVironment sports a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 25.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 22.5% over the last 60 days.

Textron Inc. TXT is one of the world's best known multi-industry companies, recognized for its powerful brands such as Bell Helicopter, Cessna, Beechcraft, E-Z-GO, Jacobsen and many more. 

The company has expected earnings growth of 35.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.6% over the last 60 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Northrop Grumman Corporation NOC is a leading global security company offering a broad portfolio of capabilities and technologies that enable them to deliver innovative products, systems and solutions for applications that range from undersea to outer space and into cyberspace.

Northrop Grumman a Zacks Rank #2 (Buy). The company has expected earnings growth of 27% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.1% over the last 60 days.

FLIR Systems, Inc. FLIR designs, develops, manufactures, markets, and distributes technologies that enhance perception and awareness. 

FLIR Systems has a Zacks Rank #2. The company has expected earnings growth of 18.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.9% over the last 60 days.

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Harris Corporation (HRS) : Free Stock Analysis Report
 
Northrop Grumman Corporation (NOC) : Free Stock Analysis Report
 
Transdigm Group Incorporated (TDG) : Free Stock Analysis Report
 
Rockwell Collins, Inc. (COL) : Free Stock Analysis Report
 
AeroVironment, Inc. (AVAV) : Free Stock Analysis Report
 
Esterline Technologies Corporation (ESL) : Free Stock Analysis Report
 
United Technologies Corporation (UTX) : Free Stock Analysis Report
 
Textron Inc. (TXT) : Free Stock Analysis Report
 
FLIR Systems, Inc. (FLIR) : Free Stock Analysis Report
 
L3 Technologies Inc. (LLL) : Free Stock Analysis Report
 
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