Baird Previews Aerospace & Defense Q4: 'Long Defense, Tactical On Bizjets'

Baird is positive on the aerospace and defense sector ahead of the fourth-quarter reporting season, expecting all of defense companies to report solid quarters. Also, the sector has a nice set up with FY 2018 Department of Defense budget request around the corner.

“Increasing international sales, incremental growth from domestic outlays continue to provide tailwinds for defense companies earnings and cash flow in 4Q16,” analyst Peter Arment wrote in a note.

The analyst noted that the FY 2018 DoD budget request in March should provide further visibility on long-term growth for weapons spending of mid-single-digits. Arment expects $40+ billion increase initially from the FY 2017 levels.

Defense

Arment recommends both Lockheed Martin Corporation LMT and Raytheon Company RTN for short-term investors, with both expected to have solid reports. Meanwhile, the analyst believes Lockheed Martin’s F-35 concerns are overblown.

Further, General Dynamics Corporation GD remains Baird’s top pick for 2017 despite some noise tied to the accounting change at Gulfstream.

“We believe long-term investors should look through any confusion and aggressively buy GD if weak on the print,” Arment continued.

Aerospace

On the aerospace front, the analyst said robust global air traffic supports higher earnings and free cash flow for many in the industry despite cuts in legacy programs like the 777. The healthy traffic growth should also support mid-single-digit growth in aftermarket spares and services.

Meanwhile, the analyst expects bizjet replacement cycle could commence in 2017 with potential major tax reform on the horizon.

Arment also urged investors to add positions in Textron Inc. TXT if shares pullback on the print as he believes better fourth quarter bizjets orders supports the long-term bullish thesis.

Earnings Dates

Following is a list of earnings dates of key A&D companies with Baird’s ratings and price targets:

• January 20 — Rockwell Collins, Inc. COL: Neutral, $90.
• January 23 — Mercury Systems Inc MRCY: Outperform, $34.
• January 24 — Lockheed Martin Corporation: Outperform, $284.
• January 25 — Boeing Co BA: Outperform, $182.
• January 25 — Textron: Outperform, $60.
• January 25 — United Technologies Corporation UTX: Neutral, $110.
• January 26 — L3 Technologies Inc LLL: Outperform, $184.
• January 26 — Northrop Grumman Corporation NOC: Outperform, $260.
• January 26 — Raytheon Company: Outperform, $170.
• January 27 — General Dynamics Corporation: Outperform, $215.
• January 27 — Honeywell International Inc. HON: Outperform, $132.
• February 2 — B/E Aerospace Inc BEAV: Neutral, $61.
• February 2 — Triumph Group Inc TGI: Underperform, $21.
• February 7 — TransDigm Group Incorporated TDG: Outperform, $310.
• February 9 — Spirit AeroSystems Holdings, Inc. SPR: Outperform, $64.
• February 10 — FLIR Systems, Inc. FLIR: Neutral, $34.