3 Top-Ranked Defense Stocks That Brokers Love

The U.S. aerospace and defense industry has been grabbing investors’ attention of late. Particularly with the Trump presidency, defense stocks have been on a growth trajectory, courtesy of the latest policies adopted by the new administration.

Cross-border tension stemming from repeated missile tests of North Korea also provided impetus to these stocks. The rise in defense spending by other major regional powers such as Japan, China and India has also been a booster.

Favorable Budgetary Allocations

Trump unveiled Pentagon's fiscal 2018 (FY 2018) budget proposal on Mar 16, 2017 which reflected a total increase of $54 billion over the FY 2017 level. The proposed budget of $639 billion includes a base budget of $574 billion, reflecting a $52 billion increase over the FY 2017 level of $587 billion. This also includes $65 billion funding for Pentagon’s overseas contingency operations (OCO) fund, higher than the FY 2017 level by $2 billion.

In September 2017, the U.S. Senate passed the National Defense Authorization Act, better known as the FY18 defense policy bill, worth roughly $700 billion. It authorized an additional $8.5 billion for the Missile Defense Agency to strengthen homeland, regional and space missile defense, which is $630 million higher than the Trump administration's request. The legislation also authorizes more than $141 billion for military personnel costs, providing a 2.1% increase in pay for troops.

Needless to say, such favorable budgetary allocations have boosted the performance of defense stocks lately.

Eye-Catching Deals

New macro-economic challenges along with rising competition have prompted defense players to restructure their business models as well as expand their product lines. One such example is the acquisition deal that United Technologies Corp (NYSE:UTX). UTX inked this September, to take over Rockwell Collins (NYSE:COL), Inc. COL for $30 billion.

In the same month, Northrop Grumman Corp (NYSE:NOC). NOC agreed to buy rocket-maker Orbital ATK, Inc. OA for $9.2 billion. Such mega-deals are expected to give birth to even bigger defense giants in this space, thereby strengthening the nation’s security as large corporations like these team up with diverse products in their portfolio.

Solid Earnings Numbers

As we are well-past this year’s Q3 reporting cycle, a quick glance at the broader Aerospace sector’s performance, of which aerospace and defense industry is significant part, reveals strong results. Notably 80% of the stocks in this sector topped earnings estimates. The revenue beat ratio of these stocks is 30%.

Going ahead, for 2017 as a whole, earnings for these stocks are expected to grow 7.5% year over year, while that for revenues reflect an annual growth of 2.4%.

Zacks Industry Rank

The Zacks Industry Rank relies on the same estimate revisions methodology that drives the Zacks Rank for stocks. The way to look at the complete list of industries is that, we put our X industries (all 265 of them) into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).

Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by a factor of more than 2 to 1. (To learn more visit: About Zacks Industry Rank)

The Aerospace sector is further sub-divided into three industries at the expanded level: aerospace/defense, aerospace/defense equipment and electric-military.

Aerospace/defense, with a Zacks Industry Rank #81, as well as aerospace/defense equipment with a Zacks Industry Rank #105 came in the top half.

Brokers Opinion

Despite the solid prospects highlighted by the Zacks Industry Rank of the sector, the space continues to grapple with several challenges. Issues like workforce challenges including lack of technical graduates as well as regulations imposed on international trade of defense equipment continue to plague the Aerospace sector. Moreover, China and Russia’s strengthening defense base remains a concern.

Therefore, considering these factors, to be on a safe side it might be a wise decision to chose stocks preferred by analysts who have a deep fundamental knowledge and understanding of the industry and its companies.

Notably, research shows that stocks with broker rating upgrades deliver better results than those that get downgraded. Therefore, stocks with brokerage upgrades are likely to be the safest bet.

Stocks Likely to Be in the Spotlight

With the help of our Zacks Stock Screener, we have selected 3 defense stocks that have been given Strong Buy/Buy rating by 50% or more brokers. A favorable Zacks Rank #1 (Strong Buy) or 2 (Buy), which justifies a company’s strong fundamentals, further adds value to these stocks. You can see the complete list of today’s Zacks #1 Rank stocks here.

First on our list is Curtiss-Wright Corporation (NYSE:CW) . Curtiss-Wright, a Zacks Rank #1 stock, provides engineered products and services to the aerospace and defense industry. Its Defense segment's products include commercial off-the-shelf embedded computing board level modules, turret aiming and stabilization products, weapons handling systems, avionics and electronics, flight test equipment, and aircraft data management solutions.

The 2017 Zacks Consensus Estimate for this company’s earnings stands at $4.75, reflecting 1.3% improvement over the past 30 days. Moreover, this estimate represents a 13% year-over-year increase. In the past 30 days two analysts have upgraded their current-year earnings estimate for this company, compared to no downgrade.

Next is Teledyne Technologies Inc. (NYSE:TDY) , another Zacks Rank #1 stock. It provides instrumentation, digital imaging as well as aerospace and defense electronics. Its Aerospace and Defense Electronics segment provides electronic components and subsystems and communications products, including defense electronics.

The 2017 Zacks Consensus Estimate for this company’s earnings is pegged at $6.15, reflecting 7.9% improvement over the past 30 days. Moreover, this estimate represents a 9.4% year-over-year increase. In the past 30 days one analyst has upgraded current-year earnings estimate for this company, compared to no downgrade.

Leidos Holdings, Inc. (NYSE:LDOS) is another valuable stock. The company currently carrying a Zacks Rank #2 provides technology and engineering services and solutions in the defense, intelligence, civil and health markets. The company operates through National Security Solutions which offers national security solutions and systems for air, land, sea, space, and cyberspace.

The 2017 Zacks Consensus Estimate for this company’s earnings stands at $3.68, reflecting 3.7% improvement over the past 30 days. Moreover, this estimate represents a 4.9% year-over-year increase. In the past 30 days four analysts have upgraded their current-year earnings estimate for this company, compared to no downgrade.

Bottom Line

For novice investors, investing in defense stocks can be a viable option. However, they must choose stocks with precaution to ward off risk. In this regard, the above mentioned stocks are expected to be good bets given their top ranks and brokers’ confidence.

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