Military

Goldman Sachs Says 3 Aerospace and Defense Stocks May Be the Best Offense in 2022

Staff Sgt. Markus Maier / U.S. Air Force

Incredible as it may seem, just five stocks accounted for 51% of the S&P 500’s return since the end of April, and all of them were mega-cap technology companies. So we at 24/7 Wall St. wondered if it would be a smart move to chase those companies in 2022 when the median price-to-earnings ratio of the top 10 largest U.S. stocks is now as high as it was at the peak of the tech bubble? Most sensible investors would say not, but the reality is that until there is a massive meltdown like in 1928-1929 and 1999-2000, we may see the market continue to grind higher in 2022.
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A new Goldman Sachs research report includes the firm’s top picks in the aerospace and defense sector for 2022. Three of the top picks are on the firm’s well-respected U.S. Conviction List of top stocks to buy. They report noted this:

While the pandemic and travel restrictions remain risks, we think 2022 will see the global air travel recovery gather momentum and view the recent sell-off as an opportunity. The business jet and domestic travel recoveries in 2021 clearly show strong demand to fly absent restrictions, and each COVID-19 wave has had a smaller impact on air travel than the prior. That being said, new variants and lockdowns clearly create volatility in aerospace stocks. So in a 2022 travel recovery that is likely lumpy, we think (1) business jets can outperform in many scenarios, (2) aerospace OE normalization is underappreciated, and (3) aerospace aftermarket could be choppy near term despite being a great business long-term.


Nine top stocks are Buy rated and make great sense for investors in 2022, and here we focus on the three on Goldman Sachs Conviction List. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Boeing

This stock has sold off recently and is providing a very solid entry point. Boeing Co. (NYSE: BA) is the world’s leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined.

The company’s different segments are Commercial Airplanes; Boeing Defense, Space & Security; and Boeing Capital. The latter provides financial solutions facilitating sale and delivery of Boeing commercial and military aircraft, satellites and launch vehicles.

The analysts are very positive on the company and noted this:

As air travel has recovered airlines are increasingly committing to fleet modernization, which we expect to support a continued rebound in new aircraft orders this year. We also see a relatively high likelihood of three catalysts over the next few months that should allow the market to look out to normalized earnings and cash flow, and remove critical overhangs on the stock. Those are (1) China 737 MAX regulatory approval, (2) FAA approval to resume 787 deliveries, (3) an international and business travel acceleration. We see normalized free cash flow per share in the $20s by the mid 2020s.

The analysts see the company posting an estimated 57% sales growth in 2022. The Goldman Sachs price objective for Boeing stock is $305. The consensus target is lower at $260.67, and the shares closed on Monday at $197.40, down almost 4% for the day.

Raytheon Technologies

This stock has backed up recently and offers perhaps the best value in the sector. Raytheon Technologies Corp. (NYSE: RTX) is an industry leader in defense, government electronics, space, information technology and technical services.
With a history of innovation spanning 97 years, Raytheon provides state-of-the-art electronics, mission systems integration, C5I products and services, sensing, effects and mission support for customers in more than 80 countries.

In 2019, United Technologies and Raytheon agreed to merge their businesses to create a new aerospace and defense powerhouse. The two companies received unanimous approval from their respective boards, and the merger is finally complete, with the new company now called Raytheon Technologies.
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The Goldman Sachs team remains positive and said this in the report:

This high quality aftermarket and defense driven business remains inexpensive on longer-term normalized numbers, the path to which is becoming increasingly clear. We see aftermarket and narrow body OE recovery driving accelerating margins in 2022, with continued growth in the Defense business.

Investors in Raytheon Technologies stock receive a 2.42% dividend. Goldman Sachs has a $104 price objective, while the consensus target is $103.65. Shares closed at $84.33 on Monday.

Textron

This is another industry giant that offers solid upside for investors. Textron Inc. (NYSE: TXT) is a conglomerate with the following operating segments:

  • Textron Aviation manufactures light-to-medium-sized aircraft.
  • Bell Helicopter.
  • Textron Systems.
  • Industrial Products manufactures machinery and equipment for golf/turf, wire and cable installation systems, plastic fuel tanks (Kautex), pumps, gears and gearboxes.
  • Textron Financial is a commercial lending operation that primarily provides equipment financing.

The company has a very solid new product pipeline, and the analysts feel the company is demonstrating that new products are the superior solution to combating tough end markets. They said this about the company:

In a structurally stronger business jet end-market, we see TXT well positioned to capitalize on higher volume and better pricing particularly in light/mid cabin aircraft. We also see upside drivers in the other businesses. With shares still trading at a sizable valuation discount to other aerospace companies, and consensus estimates that look too low, we see meaningful upside in the stock.

Shareholders receive just a 0.12% dividend. The $91 Goldman Sachs price target is well above the $86.00 consensus target. Textron stock closed on Monday at $73.13.


These three top stocks are also among the top selections at Goldman Sachs. While they are not as exciting perhaps as momentum-juiced technology stocks, they have strong growth potential and will be standing long after many of the WallStreetBets stocks are in the Wall Street graveyard.

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