The Aerospace-Defense industry has been an incredible performer so far this year, up 37.7% compared to a 12% gain for the S&P 500. This uptick has been partly due to increasing global tensions, and therefore increased demand for military equipment.
U.S. defense spending has increased each of the past 5 years, with the 2020 budget set to rise to between $733 billion and $750 billion. In 2019, the DoD’s budget is $693 billion. International turmoil has the DoD especially focused on being ready to meet new threats. With aerospace at the forefront of the DoD’s strategic priorities, firms in this industry are perfectly poised to benefit from procurement and advancement of military technology.
With the trade war impacting a large segment of the stock market, investors are likely looking for safe havens. While 2018’s steel tariffs have impacted the industry by raising steel prices, these prices have since fallen almost back to pre-tariff levels. Tariffs on Chinese goods have not affected the defense market as much as other industries, due to the defense industry relying exclusively on domestic suppliers and manufacturers.
Below are three attractive aerospace-defense equipment manufacturers that are fairly isolated from the trade war. These companies will likely benefit from increased government spending in this sector as well.
Teledyne Technologies Incorporated TDY
Teledyne shares are up 40.9% YTD, outperforming the broader Aerospace-Defense industry. Teledyne is an industrial conglomerate that manufactures products in four focus areas: Instrumentation, Digital Imaging, Engineered Systems, and Aerospace and Defense. Aerospace is the most directly impacted by defense spending and makes up 24% of sales, but the other three areas also sell significant amounts of equipment to the government.
Our Zacks Consensus estimates show a 14.35% increase in earnings for this quarter from a year ago. Next quarter, earnings are projected to jump 10.73% over the prior year period to $2.58 per share. Plus, earnings are expected to see double-digit growth for fiscal 2019 and fiscal 2020.
Teleydne is currently a Zacks Ranks #1 (Strong Buy), as all estimates have been raised significantly within the past 30 days. During Teledyne’s Q2 earnings call on July 24th, the company raised its full year 2019 earnings outlook by $0.21 to the range $9.86 to $9.96 per share.
Northrop Grumman Corporation NOC
Northrop shares are up 48.5% YTD, just recently passing through record highs set early 2018. Northrop Grumman is one of the world’s largest weapons manufacturers and military technology providers; its largest divisions are Aerospace and Mission Systems. Northrop does not just sell its products to the U.S. It currently sells to and services in 25 countries, although it needs government approval to do so.
Earnings estimates show a 27.52% decline in this quarter from last year. However, last year’s Q3 earnings were abnormally high, a 77.7% increase over Q3 2017. Fiscal 2019 earnings are projected to drop by 7.97% from last year, but revenues are projected to rise by 13.01%. Fiscal 2020 projections show earnings increasing by 14.04% to $22.39. Northrop currently holds a Zacks Rank #2 (Buy), due to upward earnings revisions for full year 2019 and 2020.
TransDigm Group Incorporated TDG
Shares of TransDigm Group are up 51.7% YTD, easily beating both its industry and the S&P 500. TransDigm manufactures commercial and military aerospace components through 35 different business groups. 35% of its business comes from defense spending, its fastest growing segment by revenue, while the rest comes from commercial customers. Most of the company’s products are highly engineered and proprietary, setting TransDigm apart from most parts manufacturers.
Estimates show current quarter earnings jumping 11.94% year over year. Next quarter looks similar, promising with projections of 17.14% growth. Full year predictions have earnings remaining roughly constant with last year, but with revenue jumping 44.78%. For fiscal 2020, both revenue and earnings are expected to increase 21%. TransDigm currently holds a Zacks Rank #1 (Strong Buy), due to all estimates being raised significantly in the past month.
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