Military

3 Top Defense Stocks That Still Offer Big Upside Potential

Lee Jackson

Published: March 6, 2018 8:55 am

Last Updated: January 12, 2020 2:44 am

Needless to say, the defense industry has had a remarkable run over the past couple of years, with some of the large cap sector leaders turning in outstanding gains for investors. With a tax reform package in place, and a budget deal that is very favorable for the sector adding to the positives, it looks as though the rest of 2018 will be another solid year for the sector.

Analysts at SunTrust Robinson Humphrey remain very positive on three top defense stocks that all have double-digit upside to the firm’s target prices. A new research report noted this:

A multi-year budget deal coupled with tax reform likely set the stage for continued defense growth and momentum. Within the aerospace sector, we believe that supplier operating margins have peaked despite a continued delivery up-cycle.

Here are the stocks the analysts are positive on after reviewing fourth-quarter results.

FLIR Systems

This stock offers excellent upside potential and a moderate valuation. FLIR Systems Inc. (NASDAQ: FLIR) designs, develops, markets and distributes thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems and threat-detection solutions. The company’s segments include Surveillance, Instruments, Security, OEM & Emerging Markets, Maritime and Detection.

The Instruments segment provides devices that image, measure and assess thermal energy, gases and other environmental elements for industrial, commercial and scientific applications under the FLIR and Extech brands. The OEM & Emerging Markets segment provides thermal imaging camera cores and components. The Maritime segment develops and manufactures electronics and imaging instruments, and the Security segment develops and manufactures a range of cameras and video recording systems.

The analysts said this in regards to FLIR:

With 12% potential upside to our price target, we believe the bar for 2018 has been set low enough for a series of beat/lift quarters anchored by margin expansion and government growth.

The SunTrust price target for the stock is $55, and the Wall Street consensus target is $53.89. Shares closed Monday at $49.69 apiece.

Mercury Systems

The SunTrust team sees this as one of the only pure-plays on defense electronics. Mercury Systems Inc. (NASDAQ: MRCY) provides secure processing subsystems for various critical defense and intelligence programs in the United States. The company’s products and solutions are deployed in approximately 300 programs with 25 defense prime contractors. Its principal programs include Aegis, Patriot, Surface Electronic Warfare Improvement Program, Gorgon Stare, Predator, F-35 and Reaper.

The company also designs, markets and licenses software and middleware environments under the MultiCore Plus name to accelerate development and execution of signal and image processing applications on a range of heterogeneous and multi-computing platforms.

The analysts commented in the research report:

With 33% potential upside to our price target, we believe investors should look past conservative guidance to a business that we think will likely have earnings power in the ~$2.25 range in calendar year 201919, making valuation look close to par with its larger prime peers.

SunTrust has a $61 price target. The consensus figure is $56.71, and shares closed Monday at $47.47.

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Transdigm

This stock had a very volatile 2017 and is the favorite valuation play at SunTrust. 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.

The company has a unique position among the defense companies as 90% of sales are proprietary, 75% are sole-sourced and 54% are aftermarket-related. The SunTrust report noted this:

With 11% potential upside to our price target, and after a 10% increase in last quarter’s aftermarket growth, we believe sales will lead to upward revision to both top and bottom-line guidance.

The SunTrust price target is $317, though the consensus price target is higher at $325.69. The stock closed Monday at $285.58.

These three top companies could ramp up earnings big time, with the tax plan and the budget in its current form proving to be tailwinds. Plus, given the volatile situations around the globe and big foreign purchasing, the sector remains a good place to keep capital in growth portfolios.