The Russia-Ukraine war has been escalating geopolitical tensions. The participation of Western countries in providing military and financial aid to Ukraine has exposed them to the potential effects of the war. Russia has suggested it may use nuclear weapons on countries aiding Ukraine, so these governments are increasing their defense budgets. President Biden’s proposed 2023 Pentagon budget includes $813 billion in spending for national defense, up 4% from the country's last defense appropriation.
This backdrop should benefit aerospace and defense companies. Investor optimism in this space is evident in the Invesco Aerospace & Defense ETF’s (PPA) 7.3% gains over the past three months versus the SPDR S&P 500 Trust ETF’s (SPY) 3.2% loss. The global aerospace and defense market is expected to grow at an 8.5% CAGR to $1.05 trillion by 2026.
Given this backdrop, we think prominent aerospace and defense stocks Aerojet Rocketdyne Holdings, Inc. (AJRD) and Raytheon Technologies Corporation (RTX) could be ideal bets now. These companies are expected to secure major contracts from governments.
Aerojet Rocketdyne Holdings, Inc. (AJRD)
AJRD in Rancho Cordova, Calif., designs, manufactures, and sells aerospace and defense products and systems and operates through Aerospace and Defense and Real Estate segments. The company develops and manufactures liquid and solid rocket propulsion, air-breathing hypersonic engines, and electric power and propulsion for space, defense, civil and commercial applications.
On April 11, 2022, AJRD was awarded the largest RL10 contract by United Launch Alliance (ULA), a rocket manufacturer and a spacecraft launch service provider, to deliver 116 RL10C-X engines for its Vulcan Centaur rocket. Working in contract with tech giant Amazon.com, Inc. (AMZN), the selection of AJRD’s reliable and high-performance RL10 engines leveraged with its industry-leading 3D-printing technology will support the launch of the Kuiper satellite constellation.
AJRD’s net sales increased 6% year-over-year to a record $589.70 million in its fiscal fourth quarter, ended Dec. 31, 2021. The company’s operating income came in at $65.50 million for the quarter, up 12.9% from the prior-year period. Its pre-tax income was $53 million, indicating a 22.4% rise from the year-ago period. As of Dec. 31, 2021, the company had $700.40 million in cash and cash equivalents.
Analysts expect the company’s revenue to reach $2.30 billion for its fiscal year 2022, ending Dec. 31, 2022, indicating a 4.9% rise from the prior-year period. AJRD’s EPS is expected to grow at a 12.3% rate per annum over the next five years. Over the past three months, the stock has gained 6.4% in price to close yesterday’s trading session at $40.45.
AJRD’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a B grade for Growth, Value, and Quality. Click here to see the additional ratings for AJRD’s Momentum, Sentiment, and Stability. AJRD is ranked #9 of 76 stocks in the Air/Defense Services industry.
Raytheon Technologies Corporation (RTX)
Waltham, Mass.-based RTX provides advanced systems and services for commercial, military, and government customers worldwide. The company operates through four segments—Collins Aerospace Systems; Pratt & Whitney; Raytheon Intelligence & Space; and Raytheon Missiles & Defense. It focuses on technology offerings and engineering teams to deliver innovative solutions that include aerostructures, avionics, interiors, mechanical systems, mission systems, aircraft engines, power and control systems, radars, software, and other products.
On April 20, 2022, the U.S. Navy awarded RTX’s Raytheon Missiles & Defense business an activation, sustainment, and modernization contract for $483 million, with options, totaling $1.68 billion over five years. Raytheon Missiles & Defense will provide the U.S. Navy services and professionals to complete the activation and fleet introduction of the three Zumwalt-class destroyers while developing technology and warfare capabilities. This contract highlights its role as a systems integrator, from engineering and cyber protection to logistics product development and software development and upgrades. This should help RTX to nurture a long-standing relationship with the U.S. Navy.
For its fiscal year 2022 first quarter, ended March 31, 2022, RTX’s net sales increased 3.1% year-over-year to $2.07 billion. The company’s adjusted operating profit came in at $1.90 billion, up 18.9% from the prior-year period. RTX’s adjusted net income came in at $1.72 billion, indicating a 25.8% year-over-year improvement. And its adjusted EPS increased 27.8% year-over-year to $1.15. RTX had cash and cash equivalents of $6.04 billion as of March 31, 2022.
Analysts expect RTX’s EPS to improve 12.2% year-over-year to $4.79 in its fiscal year 2022, ending December 31, 2022. The company surpassed the Street’s EPS estimates in each of the trailing four quarters. The $68.55 billion consensus revenue estimate for the same fiscal year indicates a 6.5% year-over-year improvement. RTX’s EPS is expected to grow at a 16.2% rate per annum over the next five years. Over the past three months, the stock has gained 10.7% in price to close yesterday’s trading session at $98.84.
RTX’s POWR Ratings reflect its solid prospects. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Growth and a B grade for Stability and Sentiment. Click here to see the additional ratings for RTX (Value, Quality, and Momentum). RTX is ranked #8 in the Air/Defense Services industry.
AJRD shares were trading at $40.00 per share on Thursday morning, down $0.45 (-1.11%). Year-to-date, AJRD has declined -14.46%, versus a -11.62% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
2 Aerospace & Defense Stocks to Buy with Escalating Geopolitical Tensions StockNews.com
