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Forget United Technologies, Buy These Defense Stocks Instead

The past few months have not been a smooth sail for United Technologies Corporation UTX. This leading provider of technology products and services to the aerospace and building systems industries has been exposed to a tough global manufacturing landscape amid the novel coronavirus (COVID-19) outbreak. However, its soon-to-close deal in the defense sector is expected to significantly expand its market presence in the said space.

The Zacks Rank #4 (Sell) company, which has a market capitalization of $64.9 billion, has failed to impress investors with its recent share price movement. Notably, in midday trading of Monday, shares of United Technologies declined 10.2% toward an 8-year low to lead the Dow's losers. Also, in the past six months, the company has lost 44.7%, much wider than the broader industry’s decline of 28.8%.

Further, the Zacks Consensus Estimate for 2020 earnings has been revised 9.5% downward over the past couple of months from $8.71 to $7.88. This indicates bearish sentiments for this stock as seven estimates moved south while there was no movement in the upward direction.

What’s Ailing the Stock?

As the COVID-19 outbreak expanded, investors grew apprehensive about its impact on the global manufacturing supply chain. Also, the impact of this coronavirus pandemic has been acute on the global commercial aviation industry. Notably, the robust contraction of air travel on account of suspension of commercial airline routes and grounding of fleets has resulted in a significant reduction in demand in aerospace industry.

We believe that United Technologies will most likely face a significant adversity in its near-term top-line results due to its high susceptibility to the badly-hit airline sector.

Also, the company remains highly leveraged over the past few years. For instance, its long-term debt in the last five years (2015-2019) recorded an increase of 14.4% (CAGR). Notably, at 2019 end, the company’s long-term debt was $37,788 million. Also, in the same period, net interest expenses surged 55.2% year over year to $1,611 million.

It’s worth noting that in March 2020, it inched closer to the spin-off of its Otis and Carrier businesses into two independent companies as it received a green signal from its board. This is a major requisite for the consolidation of the company’s aerospace business (comprised Collins Aerospace Systems and Pratt & Whitney businesses) with Raytheon Company RTN.

Considering the aforementioned discussion, it is obvious that investors will remain skeptical about buying United Technologies’ shares any time soon.

Way Ahead

However, this should not discourage investors from choosing some better-ranked stocks from the defense domain, which boast solid prospects. Geopolitical uncertainty along with growth in U.S. defense spending is likely to make defense stocks a winning trade in 2020. Notably, the U.S. government approved a colossal defense budget of $738 billion for 2020, up from $717 billion for 2019. It is this significantly escalated budgetary provision that led to a handful of notable contract wins for the U.S. defense industry participants over the last few quarters. We expect the same trend to continue next year.

Stocks to Consider

Some of these stocks are as follows:

L3Harris Technologies Inc LHX: This is a technology-oriented aerospace and defense player that delivers advanced defense and commercial technologies across air, land, sea, space and the cyber arena. The stock carries a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for current-year earnings has been revised 1.8% upward over the past 60 days. On a year-over-year basis, its earnings estimates indicate growth of 15.2% for 2020 and 12.7% increase for 2021.

Northrop Grumman NOC: This is a global security company that provides a broad array of products and services to the U.S. Department of Defense (DoD) like electronic systems, information technology, aircraft, space technology and systems integration services. The stock holds a Zacks Rank of 2.

The consensus mark for the company’s current-year earnings has been revised 1.1% upward over the past 60 days. Notably, its earnings estimates for 2020 imply a 9.4% year-over-year improvement while that for 2021 hints at a 13.3% rise.

AeroVironment, Inc. AVAV: The company designs, develops, produces and operates a portfolio of products and services for government agencies, businesses and consumers. The company is a Zacks #2 Ranked player.

Notably, the consensus estimate for current-year earnings has been revised 8.6% upward over the past 60 days. Its current-year earnings estimates indicate year-over-year growth of 1.7% while that for the next year, suggests a 9.6% rise.

Leidos Holdings, Inc. LDOS: This company is engaged in providing solutions in the fields of cybersecurity, data analytics, enterprise IT modernization, operations and logistics, sensors, collection and phenomenology, software development and systems engineering. The company carries a Zacks Rank #2 (Buy).

Notably, the consensus estimate for current-year earnings has moved 3.1% north over the past 60 days. The earnings estimate for 2020 indicates growth of 8.7% while that for 2021 implies a 15.5% increase from the prior-year reported numbers.

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Northrop Grumman Corporation (NOC) : Free Stock Analysis Report
United Technologies Corporation (UTX) : Free Stock Analysis Report
Raytheon Company (RTN) : Free Stock Analysis Report
AeroVironment, Inc. (AVAV) : Free Stock Analysis Report
Leidos Holdings, Inc. (LDOS) : Free Stock Analysis Report
L3Harris Technologies Inc (LHX) : Free Stock Analysis Report
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