In a turbulent world, investors often lean on defense stocks, and with good reason. As the international stage becomes ever more dangerous, the United States and other countries beef up their military spending to make sure they are able to accommodate any threat or action from rogue nations. The defense sector has had a spectacular run since the election last year, and one top firm is advising clients to stay long.
In a new SunTrust Robinson Humphrey research report, the Aerospace and Defense team are positive on defense but they think the commercial aerospace arena is fully valued and trading at peak valuations. They advise investors to focus on six companies that have lagged their peers and to buy shares into year’s end. Here we focus on five that look very attractive. All are rated Buy.
The SunTrust team is positive on this off-the-radar stock. AAR Corp. (NYSE: AIR) is a provider of services and products to the commercial aviation and government and defense markets. It operates in two segments: Aviation Services, which consists of supply chain and maintenance, repair and overhaul (MRO) activities, and Expeditionary Services, which includes airlift and mobility activities.
The company’s services and products include aviation supply chain and parts support programs; MRO of aircraft and landing gear; design and manufacture of specialized pallets, shelters and containers; expeditionary airlift services; aircraft modifications; and aircraft and engine sales and leasing.
Investors receive a 0.81% dividend yield. The SunTrust price target for the stock is $42. The Wall Street consensus target is $41.17, and shares closed Thursday at $37.78.
This is another company investors may not know as well, but offers solid value at current levels. Curtiss-Wright Corp. (NYSE: CW) designs, manufactures and overhauls precision components and systems and provides highly engineered products and services to the aerospace, defense, automotive, shipbuilding, processing, oil, petrochemical, agricultural equipment, railroad, power generation, security and metalworking industries.
The company posted solid second-quarter results back in the summer that beat estimates and it raised guidance. Trading at less than 20 times next year’s estimates, the shares look very reasonable.
Investors receive a 0.6% dividend. SunTrust has a $115 price target, and the consensus target is $103.50. The stock closed Thursday at $105.70.
This stock was hit hard back in August and offers investors a very good entry point. Esterline Technologies Corp. (NYSE: ESL) primarily serves the aerospace and defense market (approximately 80% of revenues). The remaining 20% of revenues are derived by applying the same technologies to the industrial market. The company divides its business into three segments: Avionics & Controls, Sensors & Systems and Advanced Materials.
The stock was tagged on Wall Street concerns of defense programs that were sunsetting, but most are positive on the structural changes that have been made. While patience may be required, the stock looks tempting here.
The $105 SunTrust price objective is well above consensus target price of $92.80. Shares closed Thursday at $91.25.
This stock also was hit in the summer but has bounced back smartly and looks ready to break out. KLX Inc. (NASDAQ: KLXI) is the distributor and service provider of aerospace fasteners and consumables. It offers ranges of aerospace hardware and consumables and inventory management services across the world.
The company operates through two segments. The Aerospace Solutions Group’s offerings include inventory management and replenishment; creative and differential supply chain solutions, such as third-party logistics programs, special packaging and bar-coding, parts kitting; quality assurance testing and a range of purchasing assistance programs; plus the electronic data interchange capability.
Energy Services Group’s products and services include onshore completion services, wireline services, fishing services and tools, down-hole completion and production services, pressure control, accommodations and related surface rental equipment, and remanufacturing shops.
SunTrust has set its price target at $56. That compares with the consensus price objective of $55.40 and the most recent close at $53.04.
This company was hitting our insider buying screens in a big way earlier this year. Transdigm Group Inc. (NYSE: TDG) is a holding company for different businesses that provide a diverse array of products, including ignition systems, pumps, valves, motors, actuators, controls, water faucets and systems, quick disconnects and couplings, batteries, chargers and power conditioning, cockpit security systems, composites and elastomers, audio systems, and lighting and displays.
While Transdigm remains a highly charged stock following a steady barrage of short reports, the stock has solid upside potential. The shares pulled back recently on market concerns around tepid organic commercial aftermarket growth. Excluding four specific units, commercial aftermarket would have been up mid-single-digits and bookings exceeded shipments. Top analysts view the pull back in Transdigm shares as a particularly attractive buying opportunity.
The SunTrust price target is $300. The posted consensus target is $299, and the stock closed Thursday at $253.55.
These five top defense-related companies have all lagged the tremendous outperformance in the sector. All are good plays for patient long-term growth accounts looking to add defense exposure but not pay up for some of the high flyers.