Aerospace and Defense Stocks to Buy That May Dodge Government Cuts

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The stock and bond markets are anticipatory. Witness the sharp rise in interest rates when the Federal Reserve has not even tapered its bond buying program, let alone raised key lending rates. The stock market has done similar selling of some aerospace and defense stocks in advance of expected government cuts. Smart investors can make solid gains by buying stocks that were sold off in advance of possible sequester cuts.

The UBS A.G. (NYSE: UBS) team that covers aerospace and defense clearly sees risk to the sustainability of all-time high production rates at some of the top aerospace companies. They also see see potential for meaningful negative earnings per share revisions for defense with sustainability of margins key to magnitude of cuts. After crunching the data, looking at margins and growth potential, they came up with a list of the top stocks to buy.

TransDigm Group Inc. (NYSE: TDG) had a strong day Friday, up almost 3%. The company is one of the world’s leading suppliers of highly engineered proprietary aerospace components and has decided to reward its shareholders with a special $22 dividend. The UBS price target for the stock is $164. The Thomson/First Call estimate is is higher at $170.

Precision Castparts Corp. (NYSE: PCP) hit a new 52-week high Friday and was up more than 2%. It recently acquired California-based aerospace supplier Permaswage for $600 million. The deal is right in Precision Castparts’ wheelhouse as it improves dollar-content per aircraft and enhances the firm’s already-robust product suite. UBS has set a $218 price target, while the consensus target is much higher at $240.

Rockwell Collins Inc. (NYSE: COL) has dropped just under 4% in the past month and has underperformed the S&P 500 year to date. The company has bought back stock at a strong pace, and insiders have made solid purchases as well. The UBS price target is $70, and the consensus stands at $67. Investors are paid a 1.9% dividend.

United Technologies Corp. (NYSE: UTX) is the least sold short stock in the Dow Jones Industrial Average. Chinese revenue has grown 29% and sequester effects have been very limited. UBS has a $105 target on this top name, but the consensus target is at $103. Shareholders are paid a 2.2% dividend.

General Dynamics Corp. (NYSE: GD) ranks right at the top of the UBS list of stocks to buy. The U.S. Navy has awarded Electric Boat, a wholly owned subsidiary of General Dynamics, a $208.6 million contract modification to buy long lead-time material for three Virginia-class submarines. UBS has an $84 target, and the consensus target is $83. Investors receive a 2.8% dividend.

B/E Aerospace Inc. (NASDAQ: BEAV) is a top name to buy and also has a place on the Goldman Sachs Group Inc. (NYSE: GS) conviction buy list. This top stock has rallied 45% over the past 12 months but still trades at a very cheap 14 times forward earnings. UBS has put a $67 target on the stock. The consensus stands higher at $70.

Alliant Techsystems Inc. (NYSE: ATK) is a solid mid-cap name for investors to look at. Spun off from Honeywell International Inc. (NYSE: HON), the company has issued conservative guidance and is expected to raise 2014 estimates. The UBS target is $83, which was exceed during Friday’s rally. The consensus target is much lower at $75. Investors are paid a 1.2% dividend.

While government defense cuts will occur, many of these top stocks to buy have diverse product lines and businesses. Timely purchases of these names in portfolios lacking exposure to the sector may offer big rewards after worries over budget cuts taper off.

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