War in Ukraine, war in the Middle East, saber-rattling in China – there’s no question that the global security situation is turning chaotic. Closer to home, the halls of Congress are seeing an unusual degree of bipartisan agreement on defense spending. And in the stock markets, investors are taking a closer look at aerospace and defense stocks.
Military actions are notorious for running through supplies faster than expected, and defense contractors are looking at increased orders coming in for the foreseeable future. In addition, technological changes are altering the ways that militaries are structured – unmanned aircraft and ships, particularly, are coming into their own as autonomous technology improves and are likely to permanently alter air force and naval fleet compositions.
These are only a few of the factors impacting defense sector stocks. Covering the aerospace-defense sector for the investment firm BTIG, analyst Andre Madrid is especially mindful of the increasing demand from governments and militaries.
“We are currently seeing some of the strongest bipartisan support for defense spending since the Reagan administration and the late Cold War… The Russo-Ukrainian conflict, rapidly escalating into one of the deadliest European land wars since World War II, has raised concerns among America’s allies in Europe, who have now agreed to rapidly accelerate defense spending. This surge in defense spending will mean more demand from American suppliers, as the European defense supply chain is ill-equipped to tackle the spike in orders,” Madrid opined.
Looking ahead from this stance, Madrid has picked out two aerospace and defense stocks as solid buys for the near-term. We’ve used the TipRanks database to find out what the rest of the Street has to say about his picks. Let’s take a closer look.
Northrop Grumman (NOC)
The first stock on our list, Northrop Grumman, is the modern incarnation of two famous aircraft design bureaus. Both Northrop and Grumman were active in the aircraft industry before World War Two, and both companies were well-known for their combat aircraft designs during the war; Northrop’s P-61 was one of the first purpose-designed night fighters, and Grumman’s F6F was the most-produced and most successful naval fighter plane of the war. The two companies merged in 1994, and today Northrop Grumman is known for its involvement in such important aircraft programs as the B-2 bomber and its successor, the B-21; the Navy’s E-2 aerial radar aircraft and C-2 transport aircraft; and the Air Force’s T-38 supersonic trainer.
In addition, the company is heavily involved in electronic warfare, digital integration systems, the development of directed energy weapons, ballistic missiles, the unmanned Manta Ray long-range submersible, minehunting systems, the NASA Artemis launch system, and even old-fashioned munitions production. Northrop Grumman today is one of the go-to companies that the Pentagon and other US and foreign governmental and military agencies rely on to build and maintain weapons systems and to produce the tech that will support future weapons.
Defense is, and always has been, big business, and Northrop Grumman raked in $39 billion worth of revenue last year. In the first quarter of this year, the company saw a top line of $10.1 billion, up 8.6% year-over-year and some $340 million better than had been anticipated. The firm’s earnings, by GAAP measures, came to $6.32 per share, 55 cents per share ahead of the forecast.
In two important metrics that bode well going forward, Northrop Grumman saw net contract awards in 1Q24 come to $6.5 billion. The company reported a work backlog of $78.9 billion.
In short, Northrop Grumman is a defense contractor in a solid position, and BTIG’s Madrid sees that as the foundation for continued successes going forward. He writes of NOC, “We expect the company to be one of the fastest growing among the defense prime contractors through the remainder of the decade for two reasons: 1) exposure to high-growth end markets, like space and 2) incumbency on multiple critical Programs of Record (PoRs) that are deemed critical to national security. Coupled with strong free cash flow that is largely returned to shareholders through the form of buybacks and dividends, we see NOC as the most attractive long-term defense name.”
Quantifying this stance, Madrid puts a Buy rating on these shares, along with a $565 price target that points toward a one-year upside potential of almost 32%.
Overall, Wall Street is willing to buy in here, but is less bullish than BTIG. The stock has a Moderate Buy consensus rating, based on 15 recent reviews that include 6 to Buy, 8 to Hold, and 1 to Sell. The shares are priced at $431.49 and their $509.27 average price target implies an 18% gain for the coming year. (See NOC stock forecast)
Next up on our list is AeroVironment, a leader in the global market for the development and deployment of multi-mission autonomous ‘smart’ robots. These can include unmanned aircraft systems (UAS), unmanned ground vehicles (UGV), high-altitude pseudo-satellites (HAPS), and even offensive-oriented loitering munition systems (LMS). AeroVironment is a tech provider, making available the solutions to bring together the latest advances in robotics, sensors, AI, connectivity, and data analytics. The company has seen that unmanned vehicles have the potential to save lives on the battlefield, and to transform the ways that armies fight.
This defense tech firm’s chief set of products is its line of unmanned, runway-independent, reconnaissance drones. These small aircraft can be launched by a crew of soldiers, in almost any condition. They can be deployed from tanks, fighting vehicles, communications trucks, even small boats – and once up, they can orbit the battlefield while providing real-time surveillance and communications capabilities to the troops.
AeroVironment’s uncrewed ground vehicles are small, tracked robots designed to put ‘eyes on the ground.’ Able to traverse varied terrain, supported by small vehicles and even man-portable control units, these robots can scout the enemy and provide 360-degree video surveillance.
The company’s third main class of drones is the loitering munition system. These remote-controlled aircraft can orbit above the fighting areas, monitoring the ground situation – while carrying a load of munitions. The operator can deliver them when needed, with precision.
Turning to the financials, AVAV beat expectations in its just-released FQ4 (April quarter) print. Revenue climbed by 5.9% YoY to a record $196.98 million, beating the analysts’ forecast by $7.99 million. At the bottom-line, non-GAAP EPS of $0.43 outpaced projections by $0.22, although that figure represented a big drop from the $0.99 generated during the same period last year.
Looking ahead, for fiscal year 2025, the company sees revenue hitting the range between $790 million and $820 million, at the midpoint below consensus at $809.7 million. This, combined with the big earnings drop, could be a possible explanation for investors’ downbeat reaction to the display.
However, assessing AVAV’s prospects, for Madrid, it is this company’s combination of high-end products, strong demand, and proven ability to deliver, that all add up to an upbeat assessment. “We see the company as the predominant unmanned system pure play with strong operational heritage across multiple decades,” said the analyst. “We see AeroVironment as a beneficiary of unmanned systems spending both domestically and abroad. We look favorably on the strong margin profile of the Small UAS product line and the proven capability of the Switchblade loitering munitions platform in Ukraine and beyond. We expect expansion into international markets to continue, serving as a tailwind to both sales and margins.”
The BTIG analyst rates AVAV shares as a Buy, and his price target, set at $255, suggests an upside of 32% over the coming months.
While there are only 3 recent analyst reviews here, they are all positive – making the Strong Buy consensus rating on the stock unanimous. The shares are priced at $192.81 and have an average price target of $228.33, indicating room for an 18.5% increase by this time next year. (See AVAV stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
