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The Zacks Analyst Blog Highlights: Boeing, Lockheed-Martin and Textron

Zacks Equity Research
Boeing's (BA) first-quarter 2019 results are likely to reflect lower costs pertaining to the KC-46 program, which in turn might boost its bottom line.

For Immediate Release

Chicago, IL –March 22, 2019 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Boeing BA, Lockheed-Martin LMT and Textron TXT.

Here are highlights from Thursday’s Analyst Blog:

Buy Boeing (BA) and Other Aerospace Stocks Despite Trade War Pullback

Aerospace-Defense

Aerospace and Defense are far from mature with innovation being the bedrock for this industry. I see only growth for those companies leading in this space. Over the past year, this industry’s equity prices have been up and down ending up close to flat for the year. I think that this underperforming industry has an enormous amount of potential for growth in 2019 as trade tensions lighten. Defense contracts being a hefty portion of revenues gives investors in this space a bit more security as well.

Boeing

Boeing, the largest aircraft manufacturer in the world, was recently devastated by two Boeing 737 MAX crashes within five months, with the most recent accident on March 10th causing a 15% drop in stock price. There is still litigation concerning these crashes underway that may have a material effect on the stock price (if the 15% drop didn’t already price this in). This drop I believe has given investors a buying opportunity. Boeing has already made many steps to resolve any underlying issues with the aircraft and airlines are still flying the 737 MAX, confident the problem isn’t systemic.

Over the last two years, BA’s bottom line has risen 53% on a year over year average with decreasing margins. In the Net Income BNRI (adjusted net income) graph below you can see that profits have never been higher. This lean operating company has also significantly grown its free cash flow to over $13 billion at the end of 2018 giving Boeing a considerable amount of financial flexibility for acquisition and internal innovation/growth.

Boeing is currently trading at an 18.10 price to earnings ratio (P/E) which is a very reasonable valuation considering this multiple got as high as 30.63 in January of last year before trade tensions hit the fan (shown on the graph below). With Boeing being the US’ largest exporter its valuation got walloped when the “trade war” with China began. Every day the tensions seem to be diminishing, with a deal looming on the horizon I am confident that a resolution is near. Getting in before this multiple adjusts up to pre-trade war levels could turn out to be a very profitable trade. With lowered multiples and raising EPS, this has placed the continuously profitable company as Zacks Rank #1 (Strong Buy).

Lockheed-Martin

Lockheed Martin is Boeings biggest competitor for government aerospace contracts being the largest defense contractor in the world. LMT has a niche portfolio of military aircraft that has won them many government contracts; most notably their F-35 program which is considered their primary growth driver is 20% of total revenue and growing. The F-35 program is incredibly expensive though, and the US government is pressuring them to reduce costs which could negatively affect the bottom line. LMT’s broader portfolio is under intense competition with almost all of their revenue coming from defense contracts. Meanwhile, competitors like Boeing who only have 22% of revenue relying on these contracts have a distinct diversification advantage. These concerns lead me to agree with Zacks Ranks #3 (Hold) for LMT.

Textron

Textron is a multi-industry conglomerate that operates five segments: Bell, Textron Systems, Textron Aviation, Industrial and Finance. Over 60% of their revenue comes from their aerial transportation segments (Bell Helicopters and Textron Aviation). They have won a number of contracts this year most notably a $912 million order for 12 AH-1Z Viper attack helicopters to the Royal Bahraini Air Force.

TXT is currently trading 28% below its 52 week high that it reached in September of last year (shown below). This drop is due to the systemic issues stemming from trade tensions as well as the overall market sell-off at the end of 2018. The company shows inconsistent top and bottom line growth because of the competitive nature of the space. There have been a few upwardly adjusted EPS estimates that have pushed the stock into a Zacks Rank #2 (Buy) spot. With trade tension easing, a diverse portfolio, and EPS estimates on the rise, this buy ranking accurately reflects how I view a position in TXT.

Conclusion

Each of these three aerospace and defense stocks have a beta above 1 meaning that they will on average outperform a bull market and underperform a bear market. This high beta is a double-edged sword and should be considered before investing in any of these stocks. When a trade deal is finally made between the US and China, I am confident that these equities should all see a substantial rally because of how much each of these companies relies on exports.

Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?

Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.


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