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NATO Members Set to Hike Defense Spending to $100B: 4 Picks

Zacks Equity Research

The news that North Atlantic Treaty Organization’s (NATO) European allies and Canada plan to reach additional defense expenditure to $100 billion by 2020 (per Reuters) has boosted U.S. defense stocks. The Zacks Aerospace sector saw 0.1% growth since NATO head Jens Stoltenberg announced this on Mar 14.

Trump’s Influence on NATO

Over the past couple of years, America’s NATO member nations have faced constant flak from President Trump for their lag in defense spending. Last July, in Brussels, Trump said that NATO allies have agreed to raise their defense spending to 2% of their GDP by 2024. The President counted this as a victory in his efforts to convince the European allies to raise their defense spending.

Recent NATO Updates on Defense Spending

Be it Trump’s steady influence or widespread global geopolitical tensions worldwide, non-U.S. NATO member nations have considerably increased their defense spending lately. In 2018, seven allies met the 2% defense spending target, contrary to just three in 2014. Moreover, other European allies as well as Canada have substantially raised their outlays by expending an additional $41 billion on defense since 2016. Interestingly, the year 2018 saw the largest increase on defense spending in 25 years.

How Will This Benefit U.S. Defense Majors?

While the United States currently spends approximately 3.5% of its GDP on defense, other NATO member states are making concerted efforts to hit the 2% target soon. Such measures will most likely lead to increased demand and requirement for advanced military aircraft, missiles and missile defense systems. With the United States being the largest weapon exporter, these developments should benefit major U.S. defense players.

It is imperative to mention in this context that majority of member nations still have not reached the 2% spending mark. As more member nations are expected to gradually bump up their defense spending, prospects for U.S. defense majors are rosier.

Our Choices

In view of the aforementioned factors, we have picked four defense players with a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Triumph Group, Inc. TGI, a Zacks Rank #1 company, manufactures a broad portfolio of aviation and industrial components and aircraft structures. It has a four-quarter average positive earnings surprise of 1.64% and an estimated long-term earnings growth rate of 4.8%.

Teledyne Technologies Incorporated, TDY specializes in developing monitoring and control instruments and digital imaging sensors. This Zacks Rank #1 company has a four-quarter average positive earnings surprise of 10.65% and an estimated long-term earnings growth rate of 7.50%.

AeroVironment, Inc. AVAV, a Zacks Rank #2 company, specializes in developing Unmanned Aircraft Systems and tactical missile systems. It has a four-quarter average positive earnings surprise of 294.51% and an estimated long-term earnings growth rate of 25%.

Heico Corporation HEI is primarily engaged in certain niche segments of aviation, defense, space and electronics. It has a four-quarter average positive earnings surprise of 4.80% and an estimated long-term earnings growth rate of 12.1%.

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