The demand for aerospace and defense (A&D) products and services is expected to grow this year, owing to the prominent rise in geopolitical instability. This environment presents a promising opportunity for investment in defense stocks.
To capitalize on this trend, one could consider investing in robust defense stocks TransDigm Group Incorporated (TDG), Northrop Grumman Corporation (NOC), and General Dynamics Corporation (GD). These companies are poised for significant growth as defense spending rises.
The global security environment is becoming more complex due to various factors. Russia’s invasion of Ukraine, the conflict between Israel and Hamas, China’s growing military capabilities, and ongoing threats from Iran and North Korea are key contributors. In response, many nations are boosting their defense investments.
In the United States, the Air Force anticipates a 60% increase in foreign military sales this fiscal year, driven mainly by higher purchases of F-35s and F-16s. The Air Force projects to book over $46 billion in weapon sales for fiscal 2024, a significant rise from $28.7 billion in fiscal 2023.
Also, the Department of Defense recently released its fiscal year 2025 budget request, totaling approximately $849.8 billion. The budget allocates $48.1 billion for naval and shipbuilding capabilities, $61.2 billion to reinforce U.S. air dominance, and $13 billion to bolster Army and Marine Corps combat capabilities.
Adopting advanced technologies such as 3D printing, artificial intelligence, and big data analytics in developing aviation and defense equipment is also creating new opportunities in the sector.
According to a report by Mordor Intelligence, the United States aerospace and defense market is projected to reach $496.56 billion in 2024 and is expected to grow at a CAGR of 5.8%, reaching $656.93 billion by 2029.
With these factors in mind, let’s examine the fundamentals of three key aerospace and defense stocks, starting with the #3 on our list.
Stock #3: TransDigm Group Incorporated (TDG)
TDG designs, produces, and supplies engineered aircraft components worldwide for commercial and military aircraft. The company operates through three segments: Power & Control; Airframe; and Non-aviation.
On July 31, TDG announced the completion of its acquisition of Raptor Labs Holdco, LLC, for nearly $665 million in cash. Raptor Scientific, known for its highly engineered and proprietary components could enhance TDG's product portfolio and strengthen its aftermarket offerings.
On June 6, TDG completed the acquisition of Communications & Power Industries' Electron Device Business for $1.39 billion. The CPI Electron Device Business is renowned for its sophisticated electronic subsystems integral to various aerospace and defense applications.
By integrating CPI's technology and expertise, TDG would be able capitalize on synergies to drive innovation and efficiency across its product lines. The acquisition would enhance TDG's ability to offer comprehensive solutions with high aftermarket content, catering to the evolving needs of its customers in the aerospace and defense sectors.
For the fiscal 2024 second quarter that ended March 30, 2024, TDG’s net sales increased 20.5% year-over-year to $1.92 billion. Its gross profit came in at $1.15 billion, up 24% from the year-ago quarter. Plus, the company’s adjusted net income and adjusted EPS rose 35.5% and 33.6% over the prior year's quarter to $462 million and $7.99, respectively,
Street expects TDG’s revenue and EPS for the fiscal 2024 third quarter, which ended in June, to increase 15.3% and 18% year-over-year to $2.01 billion and $8.55, respectively. Also, TDG has topped the consensus revenue and EPS estimates in all the trailing four quarters, which is impressive.
Shares of TDG have gained 13.9% over the past six months and 45.7% over the last year to close the previous trading session at $1,268.04.
TDG’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated considering 118 different factors, each weighted optimally.
TDG has a B grade for Momentum, Stability, Sentiment, and Quality. It is ranked #21 in the 70-stock Air/Defense Services industry.
We rate TDG on eight different levels. In addition to the POWR Rating grades I’ve just highlighted, you can see TDG’s ratings for Growth and Value here.
Stock #2: Northrop Grumman Corporation (NOC)
NOC serves the global aerospace, defense, and security sectors, focusing primarily on the United States government, including the Department of Defense and the intelligence community. It operates through four segments: Aeronautics Systems; Defense Systems; Mission Systems; and Space Systems.
Recently, NOC reported expanding its production capacity to meet escalating demands for rocket motors, armaments, and air and missile defense systems critical for the defense efforts of the United States and its allies. The investment underscores NOC’s commitment to enhancing capabilities essential to defending freedom and deterring global aggression.
A notable example of NOC’s growth trajectory is its Guided Multiple Launch Rocket System (GMLRS), where the company has achieved a substantial year-to-date revenue growth of nearly 60%. The increase reflects NOC’s successful alignment with defense priorities and ability to efficiently deliver advanced, mission-critical systems.
In parallel, NOC continues to prioritize innovation and expansion within its portfolio, committing approximately $3 billion, including investments in research and development. This underscores NOC's dedication to advancing cutting-edge technologies across its aerospace, defense, and security segments.
NOC’s total sales for the fiscal second quarter that ended June 30, 2024, amounted to $10.22 billion, up 6.7% year-over-year. Its total operating income rose 12.7% from the year-ago quarter to $1.09 billion. Also, the company’s net earnings and EPS stood at $940 million and $6.36, up 15.8% and 19.1% over the prior-year quarter, respectively.
For the fiscal year ending in December 2024, analysts expect the company’s revenue and EPS to grow 5.2% and 8.2% year-over-year to $41.33 billion and $25.20, respectively. Furthermore, NOC surpassed the consensus revenue and EPS estimates in all of the trailing four quarters.
Shares of NOC have gained 2.7% over the past five days and 12.1% over the past month to close the last trading session at $493.36.
NOC’s favorable fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Momentum, Sentiment, and Stability. NOC is ranked #10 out of 70 in the Air/Defense Services industry.
Beyond what we stated above, we have also rated NOC for Growth, Value, and Quality. Get all ratings of NOC here.
Stock #1: General Dynamics Corporation (GD)
GD offers products and services in business aviation, ship construction and repair, land combat vehicles, weapons systems and munitions, and technology products and services. The company’s segments include Aerospace; Marine Systems; Combat Systems; and Technologies.
On July 12, Gulfstream Aerospace Corp., a subsidiary of GD, inaugurated its expanded Customer Support service center at Savannah/Hilton Head International Airport. Initially announced in 2018, the phased Savannah Service Center East expansion increases Gulfstream’s Savannah service footprint to over 1.1 million sq ft/102,000 sq m.
By providing expanded facilities and enhanced customer access, GD is expected to strengthen Gulfstream’s ability to efficiently and effectively support its global customer base.
Additionally, on May 15, Gulfstream Aerospace Corp. celebrated the European Union Aviation Safety Agency (EASA) type certification of its new flagship model, the Gulfstream G700. The certification unlocks international deliveries of the G700, positioning GD to meet the demand of a broader clientele across different regions.
By expanding its product offerings and achieving regulatory milestones, GD can reinforce its leadership in the competitive business aviation sector and enhance its ability to effectively serve diverse international markets.
GD’s revenue for the fiscal second quarter that ended June 30, 2024, increased 18% year-over-year to $11.98 billion. The company’s operating earnings grew 20.2% from the year-ago quarter to $1.16 billion. In addition, its net earnings stood at $905 million and $3.26 per share, up 21.6% and 20.7% over the prior-year quarter, respectively.
For the fiscal 2024 third quarter ending September 30, 2024, GD’s revenue and EPS are expected to increase 14.9% and 22.8% year-over-year to $12.15 billion and $3.73, respectively. In addition, the company surpassed the consensus revenue estimates in each of the trailing four quarters.
The stock has gained 10% over the past six months and 30.2% over the last year to close the last trading session at $293.45.
GD’s POWR Ratings reflect its robust prospects. It has an overall B rating, equivalent to a Buy in our proprietary rating system.
GD has a B grade for Momentum, Stability, and Growth and is ranked #5 out of 70 stocks in the same industry.
Beyond what we stated above, we have also rated GD for Sentiment, Value, and Quality. Click here for the additional POWR Ratings of GD.
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GD shares fell $0.17 (-0.06%) in premarket trading Friday. Year-to-date, GD has gained 14.74%, versus a 14.97% 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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