The aerospace and defense sector gained immense traction following Russia’s invasion of Ukraine last year. As the war drags on and the nuclear threat grows, governments of several nations continue to ramp up their defense spending budgets.
Therefore, it could be an opportune time to invest in fundamentally sound defense stocks RTX Corporation (RTX), Northrop Grumman Corporation (NOC), and TransDigm Group Incorporated (TDG) to capitalize on their growth.
Defense stocks have recently outperformed the market as the United States spent billions on aid to support Ukraine following Russia’s invasion. The escalating tensions between the United States and China over Taiwan’s sovereignty have further emphasized the need for national and international security. As a result, countries are increasing their military posture, creating a strong demand for U.S. defense contractors.
U.S. defense contractors, known for their reliability, benefit from lucrative government contracts, innovative technologies, and substantial intellectual property rights. These factors further contribute to robust sales and growing profits.
Last month, the Senate passed a massive annual defense bill that would deliver a 5.2% pay raise for service members and keep the nation’s military operating, avoiding partisan policy battles with an overwhelmingly bipartisan vote.
The global aerospace & defense market grew from $795.92 billion in 2022 to $855.62 billion in 2023, at a CAGR of 7.5%. Further, the market is expected to reach a whopping $1.08 trillion in 2027, growing at a CAGR of 5.9%.
Moreover, the ongoing research and development would bring transformative advancements to this industry. Driven by technological advancements, the quest for lightweight solutions, performance enhancement goals, and the growing emphasis on sustainability, the advanced materials in the aerospace and defense market are projected to grow at a CAGR of 5.3% by 2033.
Moreover, investing in the aerospace and defense industry can be a strategic move to diversify your portfolio. Companies in this sector have the advantage of being less affected by market volatility, making them a reliable choice during market downturns.
Let’s look closer at the featured stocks.
RTX Corporation (RTX)
RTX is a global provider of systems and services for commercial, armed forces, and governmental clients in the aerospace and defense industries. Collins Aerospace; Pratt & Whitney; Raytheon Intelligence & Space; and Raytheon Missiles & Defense comprise its four operating segments.
Recently, RTX has been awarded a $36 million contract from the U.S. Air Force Research Laboratory to develop and demonstrate a platform-agnostic, Beyond-Line-Of-Sight, satellite communications pod. The pod will work with commercial and military satellites in Low Earth Orbit, Medium Earth Orbit, and Geostationary Orbit. It reflects the company’s solid offerings and should boost revenues.
On June 5, the company declared a quarterly dividend of $0.59 per outstanding share on its common stock, payable to its shareholders on September 7, 2023. RTX’s four-year average dividend yield is 2.41%, and its current dividend of $2.36 translates to a 2.72% yield on prevailing prices.
Its dividend payouts grew at a 6.3% CAGR over the past three years and a 4.9% CAGR over the past five years. Also, it has a record of 29 years of consecutive dividend growth.
On July 25, backed by its solid year-to-date performance and strong end markets, the company raised its 2023 outlook. It expects net sales to range between $73.0 and $74.0 billion, up from $72.0 – $73.0 billion. Also, its adjusted EPS is expected to fall between $4.95 and $5.05 in 2023.
In the fiscal second quarter ended June 30, 2023, RTX’s net sales increased 12.3% year-over-year to $18.32 billion. Its operating profit grew 7.8% from the year-ago value to $1.46 billion. The company’s adjusted income from continuing operations attributable to common shareowners came in at $1.89 billion, up 10% year-over-year. Also, its non-GAAP EPS increased 11.2% from the year-ago value to $1.29.
Analysts expect RTX’s EPS and revenue to increase 2.4% and 7.9% year-over-year to $1.30 and $19.53 billion for the fiscal fourth quarter (ending December 2023). It has a commendable earnings surprise history, surpassing the consensus EPS estimates in each of the four trailing quarters.
RTX’s revenue and EBITDA have grown at 13.3% and 18.7% CAGRs over the past three years, while its EBIT has increased at a 25.5% CAGR over the same period.
In addition, its trailing-12-month EBITDA and net income margins of 17.13% and 7.88% are 25.8% and 26.6% higher than the 13.62% and 6.23% industry averages. Likewise, its trailing-12-month EBIT margin of 11.22% is 15.1% higher than the industry average of 9.74%.
The stock has lost 9.5% over the past three months to close the last trading session at $86.44.
RTX’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is also rated B in Growth and Stability. Among the 71 stocks in the Air/Defense Services industry, it is ranked #23. To see additional POWR Ratings for Value, Momentum, Sentiment, and Quality for RTX, click here.
Northrop Grumman Corporation (NOC)
NOC operates as a global aerospace and defense technology company. The company operates through four segments: Aeronautics Systems; Defense Systems; Mission Systems; and Space Systems.
On August 8, NOC completed producing the first set of solid rocket motor cases for the Missile Defense Agency’s (MDA) Next-Generation Interceptor (NGI) program. The successful production of NGI solid rocket motor cases is a significant achievement that demonstrates the company’s expertise, robust designs, and manufacturing capabilities.
On May 16, the company increased its quarterly dividend by 8% to $1.87 per share on the common stock, marking the 20th consecutive annual increase. This dividend was paid to its shareholders on June 14, 2023.
NOC’s forward annual dividend of $7.48 translates to a 1.74% yield on current prices, while its four-year average dividend yield is 1.56%. Also, its dividends have grown at 9.3% and 10.4% CAGRs over the past three and five years, respectively.
For the fiscal 2023 second quarter that ended June 30, NOC’s total sales increased 8.8% year-over-year to $9.58 billion, while its total operating income rose marginally from the year-ago value to $967 million. In the same period, the company’s net earnings and EPS came in at $812 million and $5.34, respectively. Also, its net cash inflow from operating activities amounted to $217 million versus a cash outflow of $685 million.
As of June 30, 2023, its cash and cash equivalents of $3.38 billion increased 31.3% from $2.58 billion for the period ended December 31, 2022.
Street expects NOC’s revenue to increase 6.2% year-over-year in the current quarter (ending September 2023) to $9.53 billion, while its EPS is expected to be $5.76 in the same period. For the fiscal year 2024, its revenue and EPS are expected to reach $40.88 billion and $24.62, registering an increase of 5.4% and 8.5%, respectively. Moreover, it surpassed the revenue and EPS estimates in three of the trailing four quarters, which is impressive.
Over the past three years, its EBITDA and net income have increased at CAGRs of 17.3% and 24.7%, respectively. Likewise, its EPS has grown at a 28.6% CAGR over the same period.
In addition, the stock’s trailing-12-month net income and levered FCF margins of 12.27% and 10.47% are 97.1% and 96.5% higher than the industry averages of 6.21% and 5.33%, respectively. Likewise, its trailing-12-month ROCE of 31.91% is 131.1% higher than the 13.81% industry average.
NOC’s shares have lost 1.5% over the past three months to close the last trading session at $429.45.
NOC’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. It also has a B grade for Stability. Within the same industry, it is ranked #21.
Click here to see the additional ratings for NOC (Growth, Value, Momentum, Sentiment, and Quality).
TransDigm Group Incorporated (TDG)
Cleveland, Ohio-based TDG manufactures and supplies highly engineered parts and devices used in commercial and military aircraft and proprietary products for defense applications. Its products include ignition systems, pumps, flight controls, cockpit displays, and radio systems. TDG’s operating segments include Power & Control; Airframe; and Non-aviation.
On August 8, the company upgraded its 2023 outlook and noted further progression in the commercial aerospace market recovery. The company guided adjusted earnings between $24.94 and $25.36 per share, compared to $17.14 per share last year. TDG sees fiscal 2023 revenue ranging from $6.52 billion and $6.58 billion, increasing from $5.43 billion in 2022.
On May 8, TDG acquired Calspan Corporation for approximately $725 million in cash, including certain tax benefits. Through this acquisition, the company is expected to enhance its position across a diverse range of aftermarket-focused aerospace & defense development and testing services.
For the fiscal third quarter that ended July 1, 2023, TDG’s net sales stood at $1.74 billion, up 24.7% year-over-year, whereas its gross profit increased 26.1% from the prior-year quarter to $1.03 billion. Also, its income from operations increased 30.7% year-over-year to $783 million.
Its adjusted net income and EPS came in at $414 million and $7.25, representing an increase of 47.3% and 49.5% year-over-year, respectively. TDG’s EBITDA As Defined grew 31.5% from the prior-year quarter to $915 million.
The consensus revenue estimate of $1.83 billion for the fourth quarter (ending September 30, 2023) represents a 21.5% increase year-over-year. The consensus EPS estimate of $7.45 for the current quarter indicates a 35.4% improvement year-over-year. The company has an excellent surprise history, surpassing the consensus revenue and EPS estimates in each of the trailing four quarters.
Its EBITDA and net income have increased at 7.9% and 6% CAGRs, respectively, over the past three years. Moreover, its EPS grew at a 15.8% CAGR over the same period.
TDG’s trailing-12-month gross profit margin of 58.37% is 92.6% higher than the 30.30% industry average. Its trailing-12-month EBIT and net income margins of 43.79% and 18.40% compares to the industry averages of 9.74% and 6.21%, respectively.
The stock has gained 37.4% year-to-date to close the last trading session at $865.01.
It’s no surprise that TDG has an overall rating of B, which equates to a Buy in our proprietary rating system. It also has a B grade for Growth and Quality. Out of 71 stocks in the same industry, it is ranked #24.
In addition to the POWR Ratings we’ve stated above, we also have TDG’s ratings for Value, Momentum, Stability, and Sentiment. Get all TDG ratings here.
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RTX shares fell $0.42 (-0.49%) in premarket trading Tuesday. Year-to-date, RTX has declined -13.35%, versus a 18.06% rise in the benchmark S&P 500 index during the same period.
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