After an outstanding 2022, the Aerospace and Defense (A&D) industry’s growth is expected to remain steady, thanks to a surge in global defense budgets amid geopolitical tensions. Given the industry’s promising growth prospects, it seems wise to invest in fundamentally sound A&D stocks L3Harris Technologies, Inc. (LHX), Textron Inc. (TXT), and Ducommun Incorporated (DCO) now.
Before discussing these stocks, Let’s first delve into what is happening within the A&D industry.
The aerospace and defense industry’s economic rebound accelerated in 2022, fueled by a surge in air travel demand. As passenger traffic gradually returns to pre-pandemic levels, the industry’s growth is bolstered by increasing orders for new aircraft and military equipment. Moreover, amid growing geopolitical tensions, several countries have enhanced their defense spending.
Last year, total world military spending rose for the eighth consecutive year to a new high of $2.24 trillion, according to new data published by the Stockholm International Peace Research Institute (SIPRI). The United States remains by far the world’s largest military spender. U.S. military expenditure reached $877 billion in 2022, accounting for 39% of global military spending.
Furthermore, the U.S. Department of Defense (DoD) spending is expected to reach $842 billion in the fiscal year 2024, an increase of 3.2% over the fiscal year 2023 and $100 billion more than the fiscal year 2022.
The Biden administration’s budget proposal also earmarks $9.10 billion for the Pentagon’s Pacific Deterrence Initiative to bolster its force posture in the region and $37.70 billion for modernizing the nuclear arsenal.
Against this scenario, let’s examine fundamentally sound A&D stocks LHX, TXT, and DCO in greater detail to understand what makes them worthwhile investments.
L3Harris Technologies, Inc. (LHX)
LHX is a leading provider of aerospace and defense technology worldwide. It operates through three segments, Integrated Mission Systems; Space & Airborne Systems; and Communication Systems. The company also operates a Link 16 Tactical Data Links business.
On April 18, LHX announced it would supply NASA’s Artemis II mission with the Mission Astronaut Communication System, enabling critical communication capabilities for the first American crewed Moon landing in over 50 years. LHX has been pushing the limits of audio technological advancements since NASA’s human space mission’s inception.
This move enables LHX to bolster further its reputation as a dependable and forward-thinking partner for space exploration. This could also lead to further partnerships with NASA and other space agencies and new possibilities for LHX to pioneer groundbreaking technology for future space missions.
On April 13, LHX announced a contract with Mitsubishi Electric Group to construct and provide an advanced imager and sounder for JMA’s Himawari-10 satellite. LHX’s ability to deliver cutting-edge weather instruments is reinforced by international partnerships, such as the one with Mitsubishi Electric Group for Japan’s vital weather requirements.
LHX’s revenues from product sales and services increased 9% year-over-year to $4.47 billion in the first quarter that ended March 31, 2023. Its cash inflows from operating activities grew 797.4% from the year-ago value to $350 million. In addition, the company’s adjusted free cash flow rose 1,265.2% year-over-year to $314 million.
The consensus revenue estimate of $18.69 billion for the fiscal year ending December 2024 reflects a 4.7% year-over-year improvement. Likewise, the consensus EPS estimate of $13.20 for the next year indicates a 7.6% rise year-over-year. The stock slumped 1.1% intraday to close the last trading session at $186.87.
LHX’s robust fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
LHX has a B grade for Stability. It is ranked #20 in the 71-stock Air/Defense Services industry.
In addition to the POWR Ratings I’ve just highlighted, you can see LHX’s ratings for Growth, Value, Quality, Sentiment, and Momentum here.
Textron Inc. (TXT)
TXT is a multi-industry company that leverages its expansive network of aircraft, defense, industrial, and financial industries to provide customers with a wide range of comprehensive solutions and services. Its segments include Textron Aviation; Bell; Textron Systems, Industrial; Finance; and Textron eAviation.
On May 8, TXT announced its plans to introduce the innovative Garmin Emergency Autoland system into its newly designed Beechcraft Denali single-engine turboprop. The Garmin Emergency Autoland system, the first-of-its-kind to be certified globally, enables the plane to land automatically in the event of pilot incapacity.
Integrating this advanced feature makes the Denali more appealing to a broader audience, providing additional reassurance and serenity to pilots and passengers.
Moreover, On March 7, Bell Textron Inc., a TXT company and leading manufacturer of helicopters and vertical lift aircraft, entered a Memorandum of Understanding (MOU) with Rotortrade, the leading global helicopter distributor, to establish the best pre-owned helicopter solutions for Bell and its clients.
Also, Rotortrade plans to expand its pre-owned inventory by integrating more Bell aircraft into its fleet. The alliance could increase demand for Bell’s products by providing customers with more affordable, pre-owned solutions, generating revenue through aircraft sales, and enhancing TXT’s reputation in the industry.
For the first quarter that ended April 1, 2023, TXT’s total revenue increased marginally year-over-year to $3.02 billion. Its EPS grew 4.5% from the year-ago value to $0.92. Additionally, as of April 1, 2023, the company’s total assets stood at $16.39 billion, compared to $16.29 billion as of December 31, 2022.
Analysts expect TXT’s revenue to increase 8.1% year-over-year to $13.91 billion for the fiscal year ending December 2023. The company’s EPS for the ongoing year is expected to rise 28.5% year-over-year to $5.15. Moreover, the company surpassed the consensus EPS estimates in three of the trailing four quarters.
Shares of TXT have gained 3.5% over the past year to close the last trading session at $64.43.
TXT’s positive outlook is apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system.
TXT has a B grade for Quality and Value. It has ranked #9 out of 71 stocks within the Air/Defense Services industry.
Click here to access additional TXT ratings for Sentiment, Stability, Momentum, and Growth.
Ducommun Incorporated (DCO)
DCO offers engineering and manufacturing services for aerospace, defense, industrial, medical, and industries. Its segments include Electronic Systems and Structural Systems. The company serves commercial aircraft, military fixed-wing aircraft, military and commercial rotary-wing aircraft, space programs, and industrial, medicinal, and other end-use markets.
On April 25, DCO announced that its subsidiary, Ducommun LaBarge Technologies, Inc., had completed the acquisition of BLR Aerospace, LLC. BLR is a leading provider of aerodynamic systems for rotary and fixed-wing commercial and military aircraft that improve their productivity, performance, and safety.
This acquisition adds important aftermarket business and strengthens DCO’s engineered products portfolio.
During the first quarter that ended April 1, 2023, DCO’s net revenues increased 10.8% year-over-year to $181.19 million. Its gross profit grew 13.2% from the year-ago value to $36.77 million. Furthermore, the company’s adjusted operating income rose 10.4% from the prior year’s period to $13.62 million, while its adjusted EBITDA came in at $23.08 million, up 15% year-over-year.
The consensus revenue estimate of $824.36 million for the fiscal year ending December 2024 indicates a 7.2% year-over-year improvement. Likewise, the consensus EPS estimate of $3.68 for the next year indicates a 38.6% year-over-year rise. Also, the company surpassed the consensus revenue estimates in all four trailing quarters, which is impressive.
Over the past year, DCO has gained 4.3% to close the last trading session at $48.23.
DCO’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
DCO has a B grade for Growth, Stability, and Value. It has ranked #15 within the same industry.
Click here to access additional DCO ratings (Sentiment, Quality, and Momentum).
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LHX shares were trading at $187.10 per share on Friday morning, up $0.23 (+0.12%). Year-to-date, LHX has declined -9.64%, versus a 7.85% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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