4 Defense Equipment Stocks to Buy Amid Supply Chain Issues

Steadily improving air traffic across the globe has been boosting the growth prospects of the  Zacks Aerospace-Defense Equipment industry stocks. However, persistent supply-chain issues may negatively impact the operating results of the industry players. Nevertheless, valuable mergers and acquisitions are projected to improve economies of scale for the concerned stocks. Solid growth projections for the airline industry should bolster aerospace-defense equipment stocks' growth. Some key players from this industry that appear well-poised are TransDigm Group TDG, Heico Corp. HEI, Moog Inc. (NYSE: MOG-A) and AAR Corp. AIR.

About the Industry

The Zacks Aerospace-Defense Equipment industry comprises firms that manufacture various vital components for the aerospace-defense space, ranging from aerostructures, space shuttles, propulsion systems, aircraft engines, defense electronics, missile and radar systems to flight test equipment, structural adhesives, instrumentation and control systems, communication products and many more. Some of these companies also offer integrated simulation and training services to the U.S. defense force. While the majority of the revenues are generated from the production of the aforementioned accompaniments, the industry players also generate revenues by providing notable aftermarket support and services like maintenance, repair and overhaul activities to aerospace and defense players.

3 Trends Shaping the Future of the Aerospace-Defense Equipment Industry

New M&As Instill Hopes: Rising competition has historically prompted industry majors to expand their product lines through valuable mergers and acquisitions (M&As). In April 2024, Curtiss-Wright Corporation completed the acquisition of WSC, Inc. for $34 million. The buyout is expected to expand Curtiss-Wright's portfolio of advanced commercial nuclear technologies utilized in the modernization of existing power plants and the design of new power plants, such as Advanced Small Modular Reactors. In February 2024, BAE Systems completed its acquisition of Ball Aerospace for $5.55 billion. This transaction must have offered BAE Systems a robust platform for accelerating its space strategy, apart from enhancing its product portfolio with other critical defense components. Such consolidations should improve economies of scale for the industry as a whole, with the players having access to diversified business models, which in turn should bolster their revenue growth.
Impressive Air Traffic View Boosts Prospects: World air travel data has been on a steady growth trajectory for the past few months, driven by pent-up passenger demand. Per a report published by the International Air Transport Association (IATA) in December 2023, air passenger revenues are expected to witness a solid 12% year-over-year improvement in 2024, whereas revenue passenger kilometers (RPKs) growth is estimated to be 9.8% during the same period. Consequently, airline industry revenues are expected to reach a historic high of $964 billion in 2024. Such projections bode well for aerospace-defense equipment industry stocks, especially those engaged in commercial aviation.
Supply-Chain Disruption Poses Risk: The COVID-19-pandemic-driven supply-chain issues continue to impact global trades and businesses. Airlines have been directly affected by unforeseen maintenance issues on some aircraft/engine types, as well as delays in the delivery of aircraft parts and aircraft, thereby limiting capacity expansion and fleet renewal. According to some industry experts, although headwinds like the shortage of aircraft parts and delivery delays are easing of late, it might take up to two years for the entire challenge to settle down. Therefore, the supply-chain bottleneck is here to stay, which, in turn, might cause Original Equipment Manufacturers (OEMs) to scale down their production volume. This might result in lower earnings and cash flows for the aerospace and defense equipment industry in the near term.

Zacks Industry Rank Reflects Bleak Outlook

The Zacks Aerospace-Defense Equipment industry is housed within the broader Zacks Aerospace sector. It currently carries a Zacks Industry Rank #140, which places it in the bottom 44% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry's position in the bottom 50% of the Zacks-ranked industries is due to a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have lost confidence in this group's earnings growth potential over the past few months. The industry's bottom-line estimate for the current fiscal year has moved down 15% to $2.95 since Jan 31.

Before we present a few aerospace-defense equipment stocks that you may want to add to your portfolio, let's take a look at the industry's recent stock market performance and valuation picture.

Industry Beats S&P 500 & Sector

The Aerospace-Defense Equipment industry has outperformed both the Zacks S&P 500 composite and its sector over the past year. The stocks in this industry have collectively risen 27.8% in a year, while the Aerospace sector has declined 0.4%. The Zacks S&P 500 composite has surged 26.6% in the same time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of trailing 12-month EV/Sales, which is used for valuing capital-intensive stocks like aerospace-defense equipment, the industry is currently trading at 6.35X compared with the S&P 500's 3.83X and the sector's 2.32X.

Over the past five years, the industry has traded as high as 6.40X, as low as 5.22X and at the median of 5.81X, as the charts show below.

EV-Sales Ratio TTM

4 Aerospace-Defense Equipment Stocks to Buy

AAR Corp.: Based in Wood Dale, IL, AAR Corp. provides various products and services to the aviation and defense industries worldwide. It develops and manufactures advanced defense products for the U.S. military, intelligence agencies and allies. On Apr 11, 2024, the company announced that it had signed an extension and expansion of its V2500 engine component distribution agreement with Sumitomo Precision Products Co., Ltd. Under the agreement, AIR extended its exclusive agreement to distribute the V2500 pneumatic starter and starter control valve on behalf of SPP for the life of the program. The contract also expanded AAR Corp.'s exclusive distributorship with the addition of all V2500 starter/valve subcomponents.

The stock boasts a four-quarter average earnings surprise of 3.96%. The Zacks Consensus Estimate for AIR's fiscal 2024 sales implies an improvement of 16.7% over the fiscal 2023 reported sales figure. The company currently carries a Zacks Rank #2 (Buy).

Price & Consensus: AIR

Moog: Based in Elma, NY, Moog is a designer, manufacturer, and integrator of precision motion control products and solutions. On Apr 26, 2024, the company announced its first-quarter second 2024 results. Its net sales worth $930 million improved 11% year over year. Adjusted earnings per share also improved a solid 54%.
The Zacks Consensus Estimate for Moog's fiscal 2024 earnings indicates a 16.9% improvement from the previous year's registered number. The consensus mark for fiscal 2024 sales implies an improvement of 6.6% from the previous year's reported figure. The company currently carries a Zacks Rank #2.

Price & Consensus: MOG-A

TransDigm Group: Based in Cleveland, OH, TransDigm is a leading global designer, producer and supplier of highly engineered aerospace components that are used in commercial and military aircraft. On May 7, 2024, the company announced its second-quarter fiscal 2024 results. Its net sales grew 21% year over year, while earnings per share rose 31%.

The Zacks Consensus Estimate for TDG's fiscal 2024 sales implies an improvement of 18% from the previous year's reported figure. The stock boasts a long-term earnings growth rate of 17.5%. It currently holds a Zacks Rank #2.

Price & Consensus: TDG

Heico Corp.: Based in Hollywood, FL, Heico is one of the world's leading manufacturers of FAA-approved jet engine and aircraft component replacement parts. On Feb 26, 2024, the company announced its first-quarter fiscal 2024 results. The company's net sales increased 44.4% year over year to $896.4 million in the reported quarter, while its bottom line improved 22.4%.

The Zacks Consensus Estimate for HEI's fiscal 2024 sales implies an improvement of 30% from the previous year's reported figure. The stock boasts a long-term earnings growth rate of 17.6%. It currently holds a Zacks Rank #2.

Price & Consensus: HEI

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