Baird’s Top Defense and Aerospace Picks for the Rest of 2017 and 2018

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One sector that has been on fire since the election last November has been defense and aerospace sector, and with good reason. The U.S. president has made it clear that improving the nation’s defense capability and upgrading the armed forces is a huge priority. Toss in some billion dollar deals with Arab countries recently, and the future continues to look bright.

One area of concern for some investors is the elevated stock prices. In a new report, while Baird remains positive overall, the firm focuses on companies with the best growth potential going forward. Five companies make the cut, and all are rated Overweight at Baird.

Boeing

This stock has been absolutely on fire and remains a top pick at Baird. Boeing Co. (NYSE: BA) is the world’s leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined.

The different segments in the company are: Commercial Airplanes, Boeing Defense, Space & Security (BDS), and Boeing Capital Corporation, which provides financial solutions facilitating sale and delivery of Boeing commercial and military aircraft, satellites, and launch vehicles.

The Baird team is bullish on the company’s forward prospects and noted this in the research report:

Boeing continues to see year over year incremental growth on free-cash-flow, with cash being returned to shareholders via buybacks/dividends. Additionally, The company’s new segment of Boeing Global Services (BGS) could favorably impact our FCF estimates by over $1.00 per share by 2021, which further aids the capital deployment thesis.

Boeing shareholders are paid a 2.38% dividend. The Baird price objective for the stock is $274. That compares with the Wall Street consensus target price of $252.20. The stock closed Wednesday at $241.93 a share.

L3 Communications

This one stock that many analysts like into the third-quarter earnings. L3 Communications Holdings Inc. (NYSE: LLL) provides aerospace systems and a range of communication and electronic systems and products used on military and commercial platforms in the United States and internationally.

The company operates in three segments: Electronic Systems, Aerospace Systems and Communication Systems. It offers a range of products and services, including components, products, subsystems and systems, as well as related services to military and commercial customers in business areas, including precision engagement and training, power and propulsion systems, aviation products and security systems, sensor systems, warrior systems, and optics, telescopes and precision optical subsystems.

Its investors are paid a 1.65% dividend. Baird has a $201 price objective, while the consensus price target is $192.93. The shares closed on Wednesday at $182.72.

Raytheon

This company has a diversified mix of business and remains a favorite at Merrill Lynch. Raytheon Co. (NYSE: RTN) is an industry leader in defense, government electronics, space, information technology and technical services. The company operates in four principal business segments: Integrated Defense Systems, Intelligence, Information and Services, Missile Systems, and Space and Airborne Systems.

Top Wall Street analysts have noted that the strong demand for missiles is a big positive for the company as domestic bookings were up 18%.  The company reported solid second-quarter results that topped Wall Street expectations. Management raised its 2017 EPS, sales and bookings outlook. The company increased its 2017 estimated bookings guidance by $500 million to $26 billion to $27 billion on stronger than expected bookings and order pipeline.