One sector that absolutely blew higher after the election was the defense and aerospace stocks, and with good reason. Donald Trump made a point, and he made it often during the campaign, that we would be rebuilding our military. While the run was good for shareholders, many on Wall Street are starting to take a more cautious view on the sector in 2017.
A recent Jefferies report from makes it clear that the firm too is in the cautious camp. While the analysts think defense budgets can grow at a 3% compounded annual growth rate over the next few years, there could be margin pressure, and also what they define as “Risk by Tweet” as the new president is fond of using Twitter as a forum to target business at times.
With business jet deliveries down double-digits last year, and production cuts on some of the big airliner orders, the cautious stance at Jefferies is warranted. They have four top picks for 2017, and of course, all are rated Buy.
This top aerospace industrial has been on a roll since the election and may be ready to breakthrough to multiyear highs. Boeing Co. (NYSE: BA), together with its subsidiaries, designs, develops, manufactures, sells, services and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services worldwide.
The company operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital.
Recent reports indicate that the U.S. Navy plans to divest its older model F/A-18 Hornet fighter jets in coming years and hopes to buy dozens of F/A-18E/F Super Hornets to deal with a shortfall of strike fighters aboard its carriers. If implemented, the plan would provide dozens of new orders for Boeing and keep its St. Louis production line running for several more years.
The Jefferies team also sees big value in the stock and said in a research note late last year when the stock was trading right where it is now:
Boeing’s 30% dividend hike was 2 times what we had expected, although shares have declined since the announcement. The dividend yield is now ~1% higher than the average DJI yield and given that Boeing’s recent yield has been in the 3% range, we see significant upside to shares. Looking at core earnings and adding back 787 amortization, shares trade at just 13 times our 2017 estimates, in line with stable growers, while cyclical shares are carrying multiples above 20 times earnings.
The analysts noted this in the new report:
Boeing should be able to launch a 737MAX-10X before year end to customers that want a complement to their MAX fleet. The plane should probably require modest development spending and should be ready by 2020. Longer term, we expect Boeing’s effort to define the production system necessary to produce its next family of mid-market planes to become clearer somewhere between 2018 and 2019.
Boeing investors receive a 3.6% dividend. The Jefferies price objective for the stock is $185, the consensus target is $159.30. Shares closed Tuesday at $157.67.