The pandemic spiked logistics costs and stalled production globally. It also caused severe damage to the financials of aerospace and defense (A&D) companies, triggering cost-cutting measures and layoffs. The Boeing Company (BA) registered a $663 million loss in the fourth quarter of fiscal 2022 due to labor and supply strains.
Moreover, despite the industry experiencing a robust recovery, BA’s executives have been reluctant to ramp up aircraft production until the supply chain has steadied. The company is also expected to cut roughly 2,000 white-collar jobs this year.
Nevertheless, the defense industry is poised to grow significantly this year owing to the introduction of new, emerging technologies and segments such as Advanced Air Mobility (AAM), robust business models in domains such as space, and the usage of digital thread and smart factories.
Furthermore, increasing geopolitical tensions with China and Russia led to the U.S. government increasing its defense spending. Enhanced defense spending would promote R&D and manufacturing.
The National Defense Authorization Act has authorized a record $858 billion in total defense spending and includes several provisions that should interest companies that do business with the U.S. government. The U.S. A&D market is expected to grow at a CAGR of 2.4% between 2023 and 2028.
Investor’s interest in defense stocks is evident from the SPDR S&P Aerospace & Defense ETF’s (XAR) 7.8% returns over the past three months.
Therefore, investors looking to capitalize on the defense industry’s long-term growth prospects could consider investing in Lockheed Martin Corporation (LMT), Northrop Grumman Corporation (NOC), and Textron Inc. (TXT) instead of BA.
Lockheed Martin Corporation (LMT)
LMT is a security and aerospace company that researches, designs, and maintains technological systems and products. Its segments include Aeronautics; Missiles and Fire Control; Rotary and Mission Systems; and Space. LMT serves the U.S. government, and foreign military sales contracted through the U.S. government.
On February 13, 2023, LMT announced that Sikorsky, an LMT company, delivered two CH-53K helicopters to the U.S. Marine Corps in the fourth quarter of 2022. Sikorsky is expected to deliver additional multi-mission King StallionTM helicopters to the U.S. Marine Corps this year.
On February 3, the company announced that Australia would acquire 40 Sikorsky UH-60M Black Hawk helicopters. The UH-60M Black Hawks are expected to replace Australia's present fleet of non-Black Hawk multi-role helicopters with a more reliable and tested system. LMT sees strong international interest in the Black Hawk and continues to invest in the platform to benefit strategically.
Also, in December 2022, the U.S. Navy declared Full Rate Production for the CH-53K program. This action is anticipated to boost production in the following years to more than 20 helicopters per year. This should accelerate LMT's development and help the company expand.
For the fourth quarter that ended December 31, 2022, LMT’s net sales increased 7.1% year-over-year to $18.99 billion. Furthermore, the company’s non-GAAP net earnings rose 1.7% year-over-year to $2.01 billion, while its non-GAAP EPS increased 7.9% year-over-year to $7.79.
Analysts expect LMT’s revenue to increase by 3.1% from the previous year to $67.71 billion for the fiscal year ending December 2024. The company’s EPS for the same year is expected to rise 5.1% year-over-year to $28.13. Furthermore, LMT surpassed its consensus EPS estimates in three of four trailing quarters, which is impressive.
Shares of LMT have gained 10% over the past six months and 24.6% over the past year to close the last trading session at $481.97.
LMT’s POWR Ratings reflect its solid outlook. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has a Quality grade of B. In the 75-stock Air/Defense Services industry, it is ranked #8.
Beyond what we stated above, we also have LMT’s ratings for Growth, Value, Sentiment, Stability, and Momentum. Get all LMT ratings here.
Northrop Grumman Corporation (NOC)
NOC is a global aerospace and defense company. Its segments include Aeronautics Systems; Defense Systems; Mission Systems; and Space Systems. The company designs and manufactures aircraft systems, weapons, and mission systems. It also provides satellites and payloads, missile defense systems, and interceptors.
On February 9, 2023, NOC’s Common Infrared Countermeasures (CIRCM) system achieved Initial Operational Capability (IOC). This accomplishment accelerates the deployment of CIRCM systems on more than 1,500 Army aircraft.
CIRCM's modular, open systems architecture works with existing hardware, streamlines upgrades, and keeps lifecycle costs low to give flexibility and a solid foundation for future development. These advances should prove beneficial for the company.
Additionally, on January 12, the company announced its partnership with NASA to develop and test solutions for integrating large, unmanned aircraft systems into the National Airspace System (NAS).
The collaboration is expected to enhance airspace accessibility, revolutionize how unmanned systems are utilized to move cargo in American airspace, and support the establishment of airspace integration essential to manned-unmanned teaming efforts in the future. This should boost NOC’s growth and help in expanding its operations.
For the fiscal 2022 fourth quarter that ended December 31, NOC’s total sales increased 16.1% year-over-year to $10.03 billion, while its total operating income rose 22.1% from the year-ago value to $906 million. Also, the company’s adjusted net earnings and EPS came in at $1.16 billion and $7.50, up 22.2% and 25% year-over-year.
The consensus revenue estimate of $40.47 billion for the fiscal year ending December 2024 indicates a 5.6% year-over-year improvement. Furthermore, the consensus EPS estimate of $24.41 for the same year reflects a 10.6% rise from the previous year. The stock has gained 18.9% over the past year to close the last trading session at $464.28.
NOC’s promising fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system.
NOC has a B grade for Quality and Stability. Within the same industry, it is ranked #15 of 75 stocks.
In addition to the POWR Ratings I’ve just highlighted, you can see NOC ratings for Growth, Value, Sentiment, and Momentum here.
Textron Inc. (TXT)
TXT engages in the aerospace, defense, and manufacturing businesses. Its segments include Textron Aviation; Bell; Textron Systems; Industrial; and Finance. The company builds and sells commercial jets, military trainers, and defense aircraft. It also offers finance for new and pre-owned aircraft and bell helicopters.
On December 21, 2022, Textron Aviation, a division of TXT, announced that Aerus, a new regional airline in Mexico, would begin operations with the purchase of two 19-passenger configurations of Cessna SkyCourier twin-engine turboprops and four Cessna Grand Caravan EX turboprops. This could aid in the company's growth and boost its revenue stream.
Additionally, on October 18, Textron Aviation disclosed that it had agreed with Fly Alliance to purchase up to 20 Cessna Citation business jets, four firms with options for 16 additional aircraft. The purchase represents a significant milestone in Textron Aviation's ongoing partnership with Fly Alliance. The partnership could enable TXT to boost its revenues and broaden its product line.
TXT’s total revenue increased 9.5% year-over-year to $3.64 billion in the fourth quarter that ended December 31, 2022. Its income from continuing operations rose 9.2% from the year-ago value to $226 million. In addition, the company’s net income grew 9.2% year-over-year to $226 million, and its EPS rose 15.1% year-over-year to $1.07.
Analysts expect TXT’s revenue to increase 7.8% year-over-year to $13.88 billion for the fiscal year ending December 2023. The company’s EPS for the same year is expected to rise 22.7% from the previous year to $4.92. Moreover, the company surpassed its consensus estimates in three of four trailing quarters.
Shares of TXT have gained 6% over the past month and 9.5% over the past six months to close the last trading session at $74.82.
TXT’s POWR Ratings reflect its strong prospects. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
TXT has a B grade for Value, Sentiment, and Quality. It has topped the 75-stock Air/Defense Services industry.
To see additional POWR Ratings for Growth, Stability, and Momentum for TXT, click here.
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LMT shares were trading at $480.13 per share on Tuesday morning, down $1.84 (-0.38%). Year-to-date, LMT has declined -1.31%, versus a 7.00% 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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