Zacks Industry Outlook Highlights TransDigm, Bae Systems and FTAI Aviation
For Immediate Release
Chicago, IL – September 15, 2023 – Today, Zacks Equity Research discusses TransDigm Group TDG, Bae Systems BAESY and FTAI Aviation FTAI.
Industry: Defense Equipment
Link: https://www.zacks.com/commentary/2148800/3-defense-equipment-stocks-to-buy-amid-improving-air-travel-views
Valuable acquisitions are projected to improve economies of scale for the aerospace-defense equipment stocks. However, COVID-led supply-chain disruption might hurt the earnings of the industry players. Also, rising Fed rates tend to put pressure on airlines, which, in turn, may hurt aerospace-defense equipment stocks.
Nevertheless, total airline revenues are expected to recover to around 93% of the 2019 figure, as predicted by the International Air Transport Association (IATA). This bolsters the growth prospects of aerospace-defense equipment stocks, especially those involved in commercial aerospace. Some key players in this industry that you may keep in your portfolio are TransDigm Group, Bae Systems and FTAI Aviation.
About the Industry
The Zacks Aerospace-Defense Equipment industry comprises firms that manufacture various vital components for the aerospace-defense space, ranging from aerostructures, space shuttles, propulsion systems, aircraft engines, defense electronics, missile and radar systems to flight test equipment, structural adhesives, instrumentation and control systems, communication products and many more.
Some of these companies also offer integrated simulation and training services to the U.S. defense force. While majority of the revenues are generated from the production of the aforementioned accompaniments, the industry players also generate revenues by providing notable aftermarket support and services like maintenance, repair and overhaul activities to aerospace and defense players.
4 Trends Shaping the Future of the Aerospace-Defense Equipment Industry
New M&As Instill Hopes: Rising competition has historically prompted industry majors to expand their product lines through small and medium-sized mergers and acquisitions (M&As) apart from the big mergers in the industry. In August 2023, BAES Systems signed an agreement to acquire Ball Aerospace for $5.55 billion. Ball Aerospace’s proven expertise in spacecraft, mission payloads, optical systems, conformal antennas and electronically steered arrays should further bolster BAE Systems’ position in the defense space.
Earlier, in May 2023, Heico Corp. declared its intent to acquire Wencor Group. Wencor Group, which boasts a strong portfolio of products in the aftermarket space and serves varied airlines worldwide, aircraft maintenance repair and overhaul companies, military agencies and defense contractors. The acquisition will thus provide HEICO an opportunity to expand its customer base, enhance its product offerings and increase its market share in the aftermarket jet service business area. Such consolidations should improve economies of scale for the industry as a whole, with the players having access to diversified business models.
Recovering Air Traffic View Boosts Prospects: World air travel data has been on a steady growth trajectory for the past few months. Per the latest outlook published by IATA in June 2023, the airline industry is forecast to return to profitability in 2023, only three years after the historic loss of $140 billion in 2020. Total airline revenues are expected to recover to around 93% of the 2019 figure, with operating profits reaching $22.4 billion. Such projections should boost demand for aircraft parts, which, in turn should benefit aerospace-defense equipment industry stocks, especially those engaged in commercial aviation.
Unusual Strength of the Dollar Remains a Concern: Global inflation rose to 8.7% in 2022 and is likely to pull back to 6.8% in 2023, leaving the price level higher. Although this may take place at a somewhat slower pace, the price is still rising. A stronger U.S. dollar, apart from high inflation and high jet fuel prices, puts pressure on airlines. This is because U.S. dollar-denominated costs rise for all businesses whose revenues are in another currency.
An appreciated U.S. dollar value is a risk for aerospace-defense equipment stocks, particularly the ones in commercial aerospace, considering the fact that the share of jet fuel in airlines’ operating costs is considerably high, between 25% and 30%.
Supply-Chain Disruption Poses Risk: The COVID-19 pandemic has led to an unprecedented crisis in the aerospace and defense supply chain. Original Equipment Manufacturers (OEMs) need to dramatically scale back their capacity to reflect the new realities of the commercial air travel market. Such OEM rate reductions have been affecting the extended commercial aerospace manufacturing supply chain, which might lower earnings and cash flows for the aerospace and defense equipment industry in the near term.
Zacks Industry Rank Reflects Bright Outlook
The Zacks Aerospace-Defense Equipment industry is housed within the broader Zacks Aerospace sector. It currently carries a Zacks Industry Rank #48, which places it in the top 19% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few aerospace-defense equipment stocks that you may want to add to your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500, Beats Sector
The Aerospace-Defense Equipment industry has underperformed the Zacks S&P 500 Composite but outperformed its sector over the past year. The stocks in this industry have collectively gained 9.9%, while the Aerospace sector has declined 5.2%. The Zacks S&P 500 Composite has surged 13.3% in the same time frame.
Industry's Current Valuation
On the basis of trailing 12-month EV/Sales, which is used for valuing capital-intensive stocks like aerospace-defense equipment, the industry is currently trading at 5.63X compared with the S&P 500’s 3.55X and the sector’s 2.07X.
Over the past five years, the industry has traded as high as 5.86X, as low as 4.50X and at the median of 5.50X.
3 Aerospace-Defense Equipment Stocks to Buy
FTAI Aviation: New York based FTAI Aviation is an aerospace company that supplies high quality CFM56 engines, modules and material. In July 2023, the company released its second-quarter 2023 results. Its total revenues amounted to $274.3 million, up a solid 144.8% from the year-ago quarter’s level.
The Zacks Consensus Estimate for FTAI’s 2023 sales implies an improvement of 44.1% from the 2022 reported figure. Its earnings surpassed estimates by 64.3% in the last reported quarter. The company currently sports a Zacks Rank #1 (Strong Buy).
TransDigm Group: Based in Cleveland, OH, TransDigm Group is a leading global designer, producer and supplier of highly-engineered aerospace components used in commercial and military aircraft. In August 2023, the company announced its third-quarter fiscal 2023 results. Its net sales in the quarter improved 24.7% year over year, while earnings per share from continuing operations rose 50%.
The Zacks Consensus Estimate for TransDigm’s fiscal 2023 earnings indicates a 47.7% improvement from the previous year’s estimated figure. The consensus mark for TDG’s fiscal 2023 sales implies an improvement of 21.1% from the previous year’s projected figure. The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Bae Systems: Based in Farnborough, United Kingdom, Bae Systems is an international defense, aerospace and security company that delivers a full range of products and services for air, land and naval forces and advanced electronics, security, information technology solutions and customer support services. In August 2023, BAE Systems won an award worth 89 million GBP from the U.K. Ministry of Defence to enhance front-line connectivity for military personnel, link small reconnaissance drones, combat vehicles, fighter jets, aircraft carriers and military commands.
The Zacks Consensus Estimate for BAESY’s fiscal 2023 sales implies an improvement of 33.6% from the previous year’s estimated figure. The consensus estimate for the company’s fiscal 2023 earnings indicates a 16.6% improvement from the previous year’s estimated figure. BAESY currently holds a Zacks Rank #2.
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Transdigm Group Incorporated (TDG) : Free Stock Analysis Report
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