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Which Defense Stocks Could be the Leidos (LDOS) of 2020?

Archan Sarkar

Leidos Holdings LDOS delivered an outstanding performance in 2019 led by contract wins and acquisitions. The company witnessed improved revenue figures in the first three quarters of 2019 compared with the year-over-year numbers.

How Leidos Shone in 2019?

Leidos, as mentioned earlier, witnessed a great 2019, aided by many notable factors and developments. Alongside improved revenue figures, Leidos witnessed year-over-year earnings growth in all quarters of 2019. It delivered average positive earnings surprise of 10.97% in the last three quarters.

Moreover, the company was recently awarded a Global Network Management Contract by DISA, valued at $6.5 billion. In September, Leidos secured a contract worth $445 million to provide information technology services to the Air Force in the National Capital Region.

Such notable contract wins boost the company’s cash-flow generation, which, in turn, enables it to make accretive acquisitions, thereby enhancing its product portfolio and profit-generating capability. Among the company’s latest acquisitions, the takeover of IMX Medical Management Services and its affiliated businesses this August is a significant one. Notably, this positioned Leidos as the nation's premier independent medical evaluation company in the commercial market.

All these factors helped Leidos crush the defense space with more than 70% year-to-date returns in 2019. It has also outperformed the broader Aerospace sector.

What Awaits Defense Stocks in 2020?

The year 2019, so far, has been a cheerful affair for majority of U.S. defense stocks. The key reasons that spurred growth for these stocks were the heightening global political unrest, ultimately resulting in the rise of military spending, introduction of technological advancements, and rampant mergers and acquisitions within the U.S. Aerospace sector. Additionally, militaries across the globe have started upgrading their existing defense arsenal, which has also been one of the major growth factors this year.

Earlier this year, the U.S. fiscal 2020 budget was approved, which allows $750 billion for defense spending in 2020. This should provide a significant boost to companies engaged in the manufacturing of defense-based products.

On the acquisition front, 2019 witnessed mega consolidations, with defense giants Raytheon Co. RTN and United Technologies Corp. announcing a merger of equals in June to create an aerospace and defense powerhouse with an estimated value of $166 billion. Another notable merger deal was completed with Harris Corporation and L3 Technologies joining forces to form L3 Harris Technologies LHX in July, for $33.5 billion. We expect such trends to continue in 2020, and in turn, bolster the performance of the defense industry as a whole.

The Aerospace sector currently carries a Zacks Sector Rank #2, which places it in the top 13% of the 16 Zacks sectors. The group’s Zacks Sector Rank, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked sectors outperforms the bottom 50% by a factor of more than 2 to 1.

The sector’s position in the top 50% of the Zacks-ranked sectors is owing to a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have gained confidence in this group’s earnings growth potential in the past few months.

So, it’s time we take a look at some defense stocks that have the potential to match Leidos’ growth story in 2020.

4 Stocks Poised to be the Leidos of 2020

Here we have picked four stocks that have returned more than 20% on a year-to-date basis and outperformed the S&P 500. Moreover, these stocks have a favorable combination of a VGM Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. Additionally, the stocks' positive earnings estimate revisions have made these companies the potential Leidos of 2020.

Ducommun Incorporated DCO manufactures components and assemblies for commercial and military aircraft and space programs. This Zacks Rank #1 company has a VGM Score of B. The Zacks Consensus Estimate for fiscal 2020 earnings improved 11.7% over the past 90 days. Its shares have returned 40.1% year to date.

CAE Inc CAE develops simulation equipment for defense forces around the globe. This Zacks Rank #2 company has a VGM Score of B. The Zacks Consensus Estimate for fiscal 2020 earnings improved 1.8% over the past 90 days. Its shares have returned 44.6% year to date.

Safran SA SAFRY manufactures and produces aircraft, rocket engines and propulsion systems. This Zacks Rank #2 company has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2020 earnings improved 0.6% over the past 60 days. Its shares have returned 32.9% in the year-to-date period.

Air Industries Group AIRI manufactures flight critical products and ground support equipment. This Zacks Rank #1 company has a VGM Score of B. The Zacks Consensus Estimate for fiscal 2020 earnings improved 12 cents over the past 60 days. Its shares have returned 135.2% so far this year.

Zacks Top 10 Stocks for 2020

In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2020?

These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Start Your Access to the New Zacks Top 10 Stocks >>

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Leidos Holdings, Inc. (LDOS) : Free Stock Analysis Report
Air Industries Group (AIRI) : Free Stock Analysis Report
Safran SA (SAFRY) : Free Stock Analysis Report
CAE Inc (CAE) : Free Stock Analysis Report
Ducommun Incorporated (DCO) : Free Stock Analysis Report
Raytheon Company (RTN) : Free Stock Analysis Report
L3Harris Technologies Inc (LHX) : Free Stock Analysis Report
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