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U.S., South Korea to Cut Drills: Will it Hurt Defense Stocks?

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The United States and South Korean administrations recently announced that they will end the annual large-scale joint exercises that these two nations have been conducting jointly to deter aggression from North Korea.

However, the drills will not come to an end and will be re-configured into smaller exercises.

Rational Behind the Reconfiguration

Trump cited cost reduction as the primary catalyst that led America to slash the large-scale drills per a tweet made on Mar 3. He also emphasized on the fact that the decision has been taken to reduce tensions with North Korea.

In this context, Pentagon stated that this strategic move has been made to support diplomatic efforts to achieve complete denuclearization of the Korean Peninsula.

Will this Hit Defense Stocks?

Repeated missile threats by North Korea and counter threats by America have escalated cross-border tensions in the past couple of years, thereby offering a solid impetus to a number of U.S. defense majors.

Considering this aspect, some might fear that scaling down the joint exercises might hurt the demand for weaponries and in turn U.S. defense stocks.

However, a major relief for defense stock investors is that North Korea has not provided any notable update on its commitment to denuclearize the Korean Peninsula, a promise it made last June. In fact, the cut down on the drills was declared just days after U.S. President Donald Trump and North Korean leader Kim Jong Un met for the second time. The meeting ended without any deal on denuclearizing the Korean Peninsula. So, it is unlikely that North Korea will give up its nuclear weapons, at least any time soon.

Cancellation of the major war games will benefit North Korea, thereby giving it an opportunity to once again conspire against America. So, we can safely say for now that a mere scale down of military operations in South Korea is unlikely to hit the U.S. defense stocks’ growth.

Stocks in Focus

Since cutting down military drills is not likely to hurt defense stocks, let us have a look at some of the industry players. Herein, we have chosen five Zacks Rank #1 (Strong Buy) or #2 (Buy) defense stocks that flaunt favorable earnings estimate growth rates and are thus good investment options. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Boeing Company BA, the world's largest aerospace company, sports a Zacks Rank #1. Its estimated long-term earnings growth rate is 13.6%. Moreover, the Zacks Consensus Estimate for current-year earnings indicates an annual improvement of 25.7%.

Spirit AeroSystems Holdings, Inc. SPR, the largest independent non-OEM aircraft parts designers and manufacturers of commercial aerostructures in the world, sports a Zacks Rank #1 and its long-term earnings growth rate is projected to be 7.8%. Moreover, the Zacks Consensus Estimate for current-year earnings indicates an annual improvement of 19.3%.

Hexcel Corp. HXL, a structural materials producer, carries a Zacks Rank #2 and its estimated long-term earnings growth rate is 10%. Moreover, the Zacks Consensus Estimate for current- year earnings indicates an annual improvement of 15.4%.

Kratos Defense & Security Solutions, Inc. KTOS, a mission critical products provider, carries a Zacks Rank #2 and its long-term earnings growth rate is projected to be 7.5%. Moreover, the Zacks Consensus Estimate for current-year earnings indicates an annual improvement of 75%.

HEICO Corp. HEI, a jet engine and aircraft component replacement parts maker, carries a Zacks Rank #2 and its estimated long term earnings growth rate is 12.1%. Moreover, the Zacks Consensus Estimate for current-year earnings indicates annual improvement of 14.9%.

Zacks' Top 10 Stocks for 2019

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