6 Stocks Dominate Defense and Aerospace Sector, All Are Strong Buys

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Northrop Grumman

This top defense company was ranked as one of the top five defense contractors by sales last year. Northrop Grumman Corp. (NYSE: NOC) provides innovative systems, products and solutions in unmanned systems, cyber, C4ISR and logistics and modernization to government and commercial customers worldwide.

The Aerospace Systems segment designs, develops, integrates and produces manned aircraft, unmanned systems, spacecraft, high-energy laser systems, microelectronics and other systems and subsystems.

The Information Systems segment offers advanced solutions for Department of Defense, national intelligence and federal civilian, state, international and commercial customers. It provides products and services primarily in the fields of command and control, communications, cyber, air and missile defense, intelligence processing, civil security, health information technology, and government support systems.

The Technical Services segment provides logistics, modernization and sustainment services, as well as other advanced technology and engineering services, including space, missile defense, nuclear security, training and simulation services.

Shareholders receive a 1.53% dividend. Merrill Lynch has set its price objective at $370. The consensus price target is $360.44, and shares closed most recently at $314.41.

Raytheon

This company has a diversified mix of businesses 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 feel that the company could be one of the biggest winners as the global threat environment has been heightened substantially this year, and with 31% of total sales from international, the prospects remain very positive. Many cite the Patriot Missile deal signed with Poland as a good example, which could propel 2018 and beyond earnings.

In addition, many think Raytheon has the balance sheet capacity to pre-fund its pension to take advantage of the currently higher tax deduction, which could eliminate or reduce mandatory pension funding and provide a lift to 2019 free cash flow and earnings. It is set up for continued strong orders from the wave of recent foreign military sales approvals and strong pipeline of large international missile defense projects.

Raytheon shareholders are paid a 1.71% dividend. The Merrill Lynch price objective for stock is $245. The consensus target is $237.17, and shares closed Tuesday at $205.18.

United Technologies

United Technologies Corp. (NYSE: UTX) is an industrial conglomerate with four operating units:

  1. Otis: the world’s largest elevator company
  2. Climate, Controls & Security: includes Carrier, which has commercial and residential HVAC and commercial transport refrigeration equipment and fire and security
  3. Pratt & Whitney: military and civil aircraft engines and service operations
  4. Aerospace Systems: aviation controls and systems

The Merrill Lynch team note that UTC is strategically building out capability to benefit from the revolution in aircraft connectivity. The connected aircraft revolution and the shift to aircraft connectivity may drive earnings even higher in the future.

UTC investors are paid a 2.15% dividend. Merrill Lynch has a $195 price target. The consensus target is $152.76, and the stock closed Tuesday at $139.71.

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These six incredible companies dominate the sector and should continue to do so in the years to come. With third-quarter earnings reports right around the corner, it may make sense to buy partial positions here and see how the results come in.