5 Defense Stocks Poised to Surpass Q1 Earnings Estimates

The first-quarter reporting cycle for defense stocks, which are housed within the broader Aerospace sector, is underway, with a handful of industry players having released mixed quarterly performance so far. In particular, while defense bigwigs like Northrop, L3Harris Technologies, Lockheed and RTX have beat on earnings, major contractors like General Dynamics and Textron lagged the same.

Taking a look at the whole picture, we remain optimistic about the first-quarter results of the remaining defense majors, as widespread hostilities continue to engulf the global defense map, thereby compelling nations to safeguard their borders by ordering more cutting-edge defense products.

A handful of defense stocks like CAE Inc. CAE, Leidos Holdings LDOS, Curtiss-Wright Corporation LDOS, Embraer ERJ and Huntington Ingalls Industries HII, which are set to release their first-quarter results soon, are likely to beat on earnings this reporting cycle.

Factors Driving Defense Stocks' Growth in Q1

In a bid to tackle the growing geopolitical instability across the globe, particularly with the frequent hostilities erupting in the Middle East and the Russian invasion of Ukraine, governments of the majority of nations have been boosting their defense budget significantly. With the United States being the world's largest weapon manufacturer, its defense budget has always been in the spotlight. To this end, it is imperative to mention that in March 2024, the Biden administration submitted the fiscal 2025 budget proposal, which requests funding worth $850 billion for the U.S. Department of Defense (DoD), reflecting a 1% increase over fiscal 2024's enacted budget amount.

Such enhanced budgetary provisions thereby raised the chance of increased order inflows for major defense primes from Pentagon and U.S. allies. This, in turn, must have boosted the defense contractors' backlog. We expect to witness this once all the major defense players reveal their first-quarter numbers.

Ongoing conflicts like the one prevailing in the Middle East, as well as the Russia-Ukraine issue, have also proved to be beneficial for U.S. defense stocks, with these affairs prompting the U.S. government to sanction big defense aid for the affected nations.

Evidently, as of Mar 12, 2024, the United States committed more than $44.9 billion in security assistance to Ukraine since the beginning of the Biden Administration (per a report by the U.S. DoD). Moreover, last year, President Biden asked Congress to approve a $95 billion supplemental spending bill that included $14 billion for Israel.  No doubt these security aids imply a supply of military arms and ammunition, which, in turn, must have bolstered revenues for U.S. defense stocks in the first quarter.

For a handful of defense stocks like General Dynamics, which are also critical commercial aerospace industry players, the steadily growing commercial air passenger traffic has been boosting their quarterly performance. Notably, improving air travel has prompted U.S. airlines to once again start ordering and taking deliveries of aircraft from commercial jet makers. Evidently, we might witness a 1.7% rise in General Dynamics' revenues from its Aerospace segment (that came from U.S. commercial customers) in the first quarter. Similar trends are likely to have aided first-quarter performance of other defense stocks, which are yet to report.

However, some lingering factors like shortage of skilled labor, supply-chain challenges and unfavorable inflation impacts might have had some adverse impact on the overall first-quarter performance of the defense stocks.

Q1 Projections

Per our latest Earnings Preview, first-quarter earnings for the Aerospace sector are expected to improve 3% on 6.5% sales growth.

Zacks Methodology

Given the high degree of diversity in the defense space, finding the right stocks with the potential to beat estimates might be quite a daunting task. However, our proprietary Zacks methodology makes it fairly simple.
We are focusing on stocks that have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).

Our research shows that for stocks with this combination, the chances of an earnings beat are as high as 70%.

Earnings ESP provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.

Our Choices

Below we present five stocks that are expected to come up with an earnings beat this reporting cycle.
CAE is a renowned provider of simulation and modelling technologies as well as integrated training services to the defense forces around the globe. In the quarter to be reported, robust demand for the company's training and flight operations solutions across all regions, notably in Asia, can be expected to have boosted its performance. However, restructuring integration and acquisition costs relating to the AirCentre and L3H MT acquisition might have had some adverse impact on CAE's bottom line.
CAE, with an Earnings ESP of +1.07% and a Zacks Rank #3 at present, is set to release earnings soon.

The Zacks Consensus Estimate for CAE's sales is pegged at $957.3 million, indicating a 3% improvement from the year-ago quarter's reported figure.

Leidos Holdings' core capabilities include providing solutions in the fields of cybersecurity, data analytics, enterprise IT modernization, operations and logistics, sensors, collection and phenomenology, software development and systems engineering. In January 2024, LDOS successfully deployed a new Flight Service Voice Communications System (FSVCS) using Voice over Internet Protocol technology. This deployment must have fetched solid revenues for the company in the first quarter.

LDOS, with an Earnings ESP of +1.86% and a Zacks Rank #2 at present, is set to release earnings on Apr 30. The Zacks Consensus Estimate for LDOS' sales is pegged at $3.80 billion, indicating a 2.7% improvement from the year-ago quarter's reported figure.

Curtiss-Wright provides highly engineered products and services for high-performance platforms, and critical applications in key areas such as commercial aerospace and defense electronics, reactor coolant pumps for next-generation nuclear reactors as well as advanced surface treatment technologies. Increasing defense U.S. budget, which includes funding for the incremental construction of Ford-class nuclear-powered aircraft carriers and Columbia ballistic missile submarines, should boost demand for the company's nuclear propulsion equipment. This, in turn, might have benefited CW's top-line performance in the first quarter.

CW, with an Earnings ESP of +0.23% and a Zacks Rank #2 at present, is set to release earnings on May 1. The Zacks Consensus Estimate for CW's sales is pegged at $665 million, indicating a 5.4% improvement from the year-ago quarter's reported figure.

Embraer designs, manufactures and sells aircraft and aviation-related structural parts to the world's commercial aviation, executive aviation and defense markets. As one of the leaders in the commercial aircraft space, the improving commercial air travels in recent times must have bolstered ERJ's first-quarter results.

ERJ, with an Earnings ESP of +90.63% and a Zacks Rank #3 at present, is set to release earnings soon. The Zacks Consensus Estimate for ERJ's sales is pegged at $855.7 million, indicating a 19.4% improvement from the year-ago quarter's reported figure.

Another company that's likely to come up with an earnings beat this time around is Huntington Ingalls. It designs, builds and maintains nuclear-powered ships such as aircraft carriers and submarines, and non-nuclear ships, such as surface combatants, expeditionary warfare/amphibious assault and coastal defense surface ships for the U.S. Navy and Coast Guard. In February 2024, HII launched its Virginia-class submarine Massachusetts (SSN 798) into the James River at the company's Newport News Shipbuilding (NNS) division. This might have aided the company's quarterly performance.

HII, with an Earnings ESP of +0.58% and a Zacks Rank #3 at present, is set to release earnings on May 2. The Zacks Consensus Estimate for HII's sales is pegged at $2.80 billion, indicating a 4.7% improvement from the year-ago quarter's reported figure.

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