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U.S. defense stocks have declined as much as 30% since the election, driven by concerns about the potential policies of the new administration and possible cost-cutting actions the planned Department of Government Efficiency (DOGE) might recommend, wrote Jason Gursky, an aerospace and defense analyst with Citi Research. However, these concerns are "likely overdone" and such stocks may prove to be attractively priced, he added.
In addition, a tacit social contract exists between the military and its volunteer force, which is likely to perform government missions if the federal workforce is cut, Gursky continued. Related growth can be priced into defense stocks, he added.
Could America Abdicate Leadership Role?
The biggest risk to the outlook for U.S defense spending would be any change in its post-WWII role as a world military leader, Gursky wrote in a recent research note. But he questioned whether President-elect Trump will choose to pack up the military's proverbial bags and retreat to bases on the home front, leaving allies to defend themselves and allow the United States to materially cut defense spending.
"This would obviously be bad for U.S. contractors," Gursky said. "But we don't think that's the likely outcome given the potential negative impact on global trade, which remains important to the U.S. economy. In our view, isolationism simply isn't an option that's on the table."
President-elect Trump has called for U.S. allies to increase spending, and some North Atlantic Treaty Organization (NATO) member nations in Europe to do so. The result would be heightened spending levels on weapons, benefiting U.S. contractors given that as much as 20% to 30% of the industry's revenue is driven by international markets. In our view, this should support the growth outlook for the industry.
Five Defense Stocks to Buy After Share Price Plunge: Transdigm
TransDigm Group Inc. (NYSE: TDG), of Cleveland, Ohio, designs, produces and supplies engineered aircraft components. The company is Citi Research's top pick among aerospace and defense companies with a product portfolio featuring mechanical/electro-mechanical actuators and controls, specialized pumps and valves, power conditioning devices, specialized AC/DC electric motors and generators, batteries and chargers, engineered latching and locking devices.
It also offers rods and locking devices, engineered connectors and elastomers, databus and power controls, cockpit security components, and systems, engineered audio, radio and antenna systems, specialized lavatory components, seatbelts, and safety restraints, military personnel parachutes, hoists, winches, and lifting devices, and cargo loading, handling, and delivery systems. Rated as a Citi Research buy, TransDigm Group further supplies its products to distributors of commercial airlines, defense OEMs, aerospace components, industrial customers, and the U.S. and other governments.
Recent original equipment production delays, including problems specifically affecting Boeing (NYSE: BA), likely mean the commercial aftermarket is trending higher for longer, Gursky wrote. Another plus for investors is the possibility of mergers and acquisitions (M&A), he added.
Also aiding TransDigm are solid revenue visibility for global air traffic, rising equipment operator production rates and defense spending growth, Gursky wrote. The trajectory of revenue and margin growth is rising as original equipment manufacturing, he continued.
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Boston-based GE Aerospace (NYSE: GE) also is a buy recommendation of Citi Research. GE Aerospace announced during April 2024 that it began operating as an independent public company focused on the future of flight, following the completion of its GE Vernova spin-off.
At the company's Investor Day in March 2024, GE Aerospace reaffirmed its annual guidance and presented a longer-term financial outlook, including plans to achieve approximately $10 billion of operating profit in 2028. Additionally, GE Aerospace shared a capital allocation framework to invest in growth and innovation, while returning roughly 70-75% of available funds to shareholders.
The launch of GE Aerospace completed GE's multi-year financial and operational transformation. For the last several years, GE took steps aimed at strengthening its the business, slashing more than $100 billion in debt since 2018.
The company has pursued continuous improved customer service, enabling the creation of three independent companies – GE HealthCare, GE Vernova and GE Aerospace, its management said. The goal was to position each for growth and efficiency.
A big part of the GE Aerospace business is tied to aftermarket growth and services, Gursky mentioned. As OEMs struggle to increase production and deliveries, the aftermarket is poised for heightened growth for longer.
Chart courtesy of www.stockcharts.com
Five Defense Stocks to Buy After Share Price Plunge: LOAR
Loar Holdings Inc. (NYSE: LOAR), of White Plains, New York, is an aerospace and defense manufacturer and supplier. The company boasts of its established relationships with aerospace and defense original equipment manufacturers (OEMs) and Tier One manufacturers, as well as airline customers worldwide. It also is a Citi Research buy.
Its mission involves creating a strategic global alliance of companies specializing in the design and manufacture of aerospace and defense components. Loar aims to provide its partners and customers with innovative, cost-effective engineering and manufacturing capabilities and responsive, dependable service through long-term relationships.
Loar announced on Dec. 10 that it would upsize pricing of its public offering to 5,750,000 shares of its common stock, including 1,897,500 shares offered by certain stockholders and 3,852,500 shares offered by Loar at $85.00 per share. The selling stockholders granted underwriters a 30-day option to purchase up to an additional 862,500 shares of common stock at the public offering price, less underwriting discounts and commissions.
The company intends to use the net proceeds from the offering to repay borrowings outstanding under its credit agreement and, to the extent of any remaining proceeds, for general corporate purposes, including working capital. Loar will not receive any of the proceeds from the sale of common stock offered by the selling stockholders or by the underwriters under their option to purchase additional shares.
Jefferies and Morgan Stanley acted as lead book runners for the proposed offering and Moelis served as a joint book runner. Citigroup and RBC Capital Markets also acted as book runners, while Blackstone was a co-manager.
Chart courtesy of www.stockcharts.com
Five Defense Stocks to Buy After Share Price Plunge: General Dynamics Corp.
Reston, Virginia-based General Dynamics Corp. (NYSE: GD), another buy recommendation of Citi Research, is involved with most of the world's technologically advanced business jets, wheeled combat vehicles, command and control systems and nuclear submarines. Those products and services are offered through its four business groups: Aerospace, Marine Systems, Combat Systems and Technologies.
The stock has jumped 44.48% since it started to be recommended by stock picker Jim Woods, the head of the Successful Investing newsletter, on September 28, 2018. GD has risen 4.55% so this year. As a former Army paratrooper, Woods has a keen interest in defense issues and follows them closely for his Successful Investing and Fast Money Alert advisory service subscribers.
Jim Woods heads the Successful Investing newsletter and co-leads Fast Money Alert.
The company notched an overall operating margin of 11.0%, with margins of 15% in Aerospace, 14.4% from Combat Systems, 9.5% with Technologies and 7.6% by Marine Systems. Citi Research rates shares of General Dynamics as a "Buy."
Chart courtesy of www.stockcharts.com
The investment bank recommends building positions in the company due to: - An Aerospace segment growth outlook lifted by recent order trends and a backlog that gives earnings upside for the next several years;
- The company notched an overall operating margin of 11.0%, with margins of 15% in Aerospace, 14.4% from Combat Systems, 9.5% with Technologies and 7.6% by Marine Systems. Citigroup rates shares of General Dynamics as a "Buy."
- The investment bank recommends building positions in the company due to:
- An Aerospace segment growth outlook lifted by recent order trends and a backlog that gives earnings upside for the next several years.
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Lockheed Martin (NYSE: LMT), of Bethesda, Maryland, is a defense and aerospace company that resulted from a 1995 combination between Lockheed Corporation and Martin Marietta Materials, Inc. In its current form, Lockheed Martin focuses on defense, space, intelligence, homeland security and information technology. LMT rates as another Citi Research buy.
The company's key business segments are Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and Space. Lockheed Martin's management recently laid out the case that margins are likely to trough in 2024 and drift toward 11%-plus over time, driven largely by product mix.
The loss-making classified contract at Lockheed Martin's MFC business will be a tailwind in 2025, i.e., lower forward loss charges, while the rest of the margin accretive MFC portfolio is likely to grow faster than the remainder of the company. Further, new awards across the company better reflect the current cost environment and should produce margins higher than pre-pandemic backlog, according to a Citi Research note.
Chart courtesy of www.stockcharts.com
Is There a Social Contract with Volunteer Soldiers to Provide Quality Equipment
"The U.S. military has an implicit contract with its all-volunteer force to field the best weapons systems in the world in return for their service," Gursky said. "This means that these systems must be on the cutting edge of military technology, and most importantly, that they work when they reach the field. This level of commitment comes at a price, but it helps to maintain the country's ability to field an all-volunteer force."
In that light, Gursky opined it is unlikely that DoD will significantly shift its procurement approach to favor untested weapons systems simply because they are less expensive. Doing so could deter volunteers, he added.
A large part of their business tied to the aftermarket growth and services. As OEMs struggle to increase production and deliveries, we expect the aftermarket to experience higher growth for longer.
The Department of Government Efficiency (DOGE) is reportedly aiming to cut the federal workforce to save money, particularly to limit the long-tail pension and other benefit costs of employees. It could lead to a shift toward using contractors to create variable rather than fixed costs.
Five Defense Stocks to Buy After Share Price Plunge: Summary
Despite U.S. defense stocks dropping as much as 30% since the Nov. 2 presidential election, five defense stocks to buy after the pullback could give bargain-hunting investors a chance to buy shares at discounted prices. | | | Sincerely,
Paul Dykewicz, Editor
StockInvestor.com
| | About Paul Dykewicz: Paul Dykewicz is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, Seeking Alpha, GuruFocus and other publications and websites. Paul is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is the editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul also is the author of an inspirational book, "Holy Smokes! Golden Guidance from Notre Dame's Championship Chaplain", with a foreword by former national championship-winning football coach Lou Holtz. Follow Paul on Twitter @PaulDykewicz. | | | | | |
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