Last year was not a good one for commercial aerospace companies. The COVID-19 pandemic essentially shut down global air travel for more than half the year. This year shows signs of a turnaround in commercial travel that should begin to put several major industrial firms on the road to recovery.
In the defense and government services industries, however, the outlook is somewhat mixed. Stocks in big defense contractors have reached a 20-year valuation high, always a precarious perch for further gains. Companies specializing in providing cloud services, cybersecurity and a handful of other leading-edge technology could see more share price gains.
These considerations fed into an aerospace and defense industry update by analyst Matthew Akers at Wells Fargo Securities. Akers has initiated coverage of 14 aerospace and defense companies, six of which received an Overweight rating. Of those, three show potential upside of 20% to their current share prices and the other three show upside potential of between 13% and 18%.
CACI
Of the three top-rated services companies, CACI International Inc. (NYSE: CACI) is the one that Wells Fargo expects the most from. The stock is rated Overweight with a price target of $311 and upside potential of 20%. CACI’s multiple software offerings in business solutions, command and control, unified communications and cybersecurity make it the top pick overall among hedge fund managers, long-only investors and sell-side analysts.
Akers writes, “CACI’s focus on technology could help expand its addressable market while also supporting margins. We believe its pivot to a more balanced capital deployment strategy makes sense in light of market conditions …”
The stock traded higher Thursday morning, up about 1.8%, at $258.64 in a 52-week range of $190.16 to $266.31. CACI does not pay a dividend, and the consensus price target is $298.50. The company’s market cap is about $6.1 billion, and shares are lightly traded, with an average daily volume of less than 250,000.
Howmet
Specialty metals and machinery company Howmet Aerospace Inc. (NYSE: HWM) spun out of Arconic in April of 2020 and the shares have risen by more than 140% since then. Wells Fargo rates the shares as Overweight with a price target of $39 and a potential upside of 20%. Howmet benefits “from strong incremental margins as aerospace demand ramps up post COVID.” The stock is the top pick among hedge fund managers and sell-side analysts.
Howmet shares traded up about 2.3% early Thursday, at $32.60 in a 52-week range of $9.897 to $33.89. The consensus price target on the stock is $38.43. The company does not pay a dividend, and the average daily trading volume is about 3.1 million shares. Howmet’s market cap is around $14.3 billion.
TransDigm
TransDigm Group Inc. (NYSE: TDG) supplies aircraft components to both the commercial and defense markets. Wells Fargo rates the stock as Overweight with a price target of $718 and a potential upside of 20%. Over the past 12 months, the stock has added about 79%, but since late November the shares have traded in a fairly narrow range.
Akers thinks that the company’s exposure to the commercial aftermarket will help it recover faster, “driving top line growth along with better margin mix.” He sees the company as capable of maintaining cost cuts made during the pandemic, “providing an additional tailwind to profitability.”
Its shares traded up about 2.2% to $591.19, in a 52-week range of $303.51 to $633.04. The company does not pay a dividend, and the consensus price target is $681.87. TransDigm’s market cap is around $32.4 billion, and the stock is lightly traded, at fewer than 300,000 shares on average daily.
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