These defense stocks may fare best whether Biden or Trump wins in November

By Philip van Doorn

The stage is set for what could be a strong multiyear period for U.S. defense contractors

Assuming the major parties' nominees for the November U.S. presidential election will be Joe Biden and Donald Trump, it is anybody's guess who will be elected, but it can be useful for investors to consider which stock sectors or industries might fare best if one or the other were to win a second term in the White House.

Joseph Adinolfi looked earlier this week at how various stock sectors performed during the first Trump presidency and, based on a report from Sevens Report Research, looked ahead at a potential second Trump term.

One of the industry groups whose stocks Tom Essaye, publisher of Sevens Report Research, said he would expect to perform well during a second Trump term is defense.

Read: Trump's return to the White House could benefit these stock-market sectors - while undercutting others

Of course, regardless of who wins the November election, U.S. defense contractors may benefit from the depletion of hardware and munitions resulting from U.S. and other NATO countries' support for Ukraine's defense against Russia's invasion, along with renewed efforts to bolster the conventional defenses of Western European countries.

Screening U.S. defense stocks

So with the stage set for what might be a strong multiyear period for U.S. defense contractors, we began a screen with the 35 stocks held by the $5.9 billion iShares U.S. Aerospace and Defense exchange-traded fund ITA. This is a broad stock-market category that goes beyond companies making military or aeronautical hardware.

Then we added the five aerospace and defense stocks, as categorized by FactSet, that are in the S&P Composite 1500 Index XX:SP1500 but aren't in the ITA portfolio, for an initial list of 40 U.S. stocks. The S&P Composite 1500 is made up of the S&P 500 SPX, the S&P MidCap 400 MID and the S&P MidCap 600.

Then we narrowed the screen to include only companies that are covered by at least five analysts polled by FactSet and whose 2023 revenue (or estimated revenue) totaled at least $1 billion.

That leaves a list of 27 stocks.

Expected sales growth

Some companies have fiscal years that don't match the calendar, so the estimates driving this screen are based on FactSet's adjusted estimates for calendar years.

Here are the 10 aerospace and defense companies on our list that are expected to show the highest compound annual growth rates for sales from 2023 through 2025, based on consensus estimates among analysts polled by FactSet. Expected weighted sales CAGR for the S&P 500 and the S&P 500 aerospace and defense industry group are at the bottom of the table.

   Company                                    Ticker   Two-year estimated sales CAGR through 2025  Estimated 2023 sales  Estimated 2024 sales  Estimated 2025 sales 
   Axon Enterprise Inc.                        AXON                                         22.1%                $1,561                $1,924                $2,331 
   Spirit AeroSystems Holdings Inc. Class A    SPR                                          19.6%                $6,048                $7,484                $8,653 
   Heico Corp.                                 HEI                                          15.8%                $3,112                $3,890                $4,173 
   Heico Corp. Class A                        HEI.A                                         15.8%                $3,112                $3,890                $4,173 
   Boeing Co.                                   BA                                          13.2%               $77,745               $89,788               $99,658 
   TransDigm Group Inc.                        TDG                                          12.1%                $6,864                $7,911                $8,624 
   Hexcel Corp.                                HXL                                          11.5%                $1,789                $1,987                $2,223 
   Kratos Defense & Security Solutions Inc.    KTOS                                         10.3%                $1,035                $1,135                $1,261 
   AAR Corp.                                   AIR                                           9.8%                $2,138                $2,390                $2,588 
   Howmet Aerospace Inc.                       HWM                                           8.2%                $6,640                $7,142                $7,778 
   Woodward Inc.                               WWD                                           7.7%                $2,995                $3,289                $3,471 
   S&P 500                                     SPX                                           5.3% 
   S&P 500 Aerospace and Defense                                                     7.3% 
                                                                                                                                                    Source: FactSet 

There are actually 11 stocks on the list, because two common share classes of Heico Corp. (HEI) (HEI.A) are held within the ITA portfolio. According to Heico's annual 10-K filing with the Securities and Exchange Commission for 2023 (page 103), the two share classes are identical, except that the Class A shares have one-tenth the voting rights of the regular common shares.

Ratings summary for the best expected revenue growers

Leaving those 11 stocks in the same order, here's a summary of ratings and price targets among analysts polled by FactSet:

   Company                                    Ticker   Share buy ratings  Share neutral ratings  Share sell ratings  Feb. 27 price  Consensus price target  Implied 12-month upside potential 
   Axon Enterprise Inc.                        AXON                  85%                    15%                  0%        $271.82                 $306.13                                13% 
   Spirit AeroSystems Holdings Inc. Class A    SPR                   48%                    52%                  0%         $29.17                  $34.22                                17% 
   Heico Corp.                                 HEI                   72%                    14%                 14%        $193.52                 $208.29                                 8% 
   Heico Corp. Class A                        HEI.A                  72%                    14%                 14%        $155.04                 $208.29                                34% 
   Boeing Co.                                   BA                   67%                    30%                  3%        $201.40                 $261.73                                30% 
   TransDigm Group Inc.                        TDG                   64%                    32%                  4%      $1,174.22               $1,235.80                                 5% 
   Hexcel Corp.                                HXL                   38%                    52%                 10%         $75.57                  $77.83                                 3% 
   Kratos Defense & Security Solutions Inc.    KTOS                  73%                    27%                  0%         $18.68                  $21.91                                17% 
   AAR Corp.                                   AIR                  100%                     0%                  0%         $64.99                  $81.25                                25% 
   Howmet Aerospace Inc.                       HWM                   80%                    10%                 10%         $65.97                  $68.80                                 4% 
   Woodward Inc.                               WWD                   33%                    67%                  0%        $137.67                 $156.70                                14% 
                                                                                                                                                                              Source: FactSet 

Analysts' favorite defense stocks

Going back to our original pared list of 27 aerospace and defense stocks, here are the nine rated buy or the equivalent by at least 75% of analysts polled by FactSet. These are sorted by how much analysts expect the stocks to rise the over the next year:

   Company                      Ticker   Share buy ratings  Feb. 27 price  Consensus price target  Implied 12-month upside potential  Two-year estimated sales CAGR through 2025 
   V2X Inc.                      VVX                   83%         $37.83                  $59.50                                57%                                        4.4% 
   Triumph Group Inc.            TGI                   86%         $14.60                  $20.75                                42%                                        6.0% 
   AAR Corp.                     AIR                  100%         $64.99                  $81.25                                25%                                       10.0% 
   Teledyne Technologies Inc.    TDY                   90%        $424.90                 $500.55                                18%                                        4.6% 
   Axon Enterprise Inc.          AXON                  85%        $271.82                 $306.13                                13%                                       22.2% 
   Curtiss-Wright Corp.           CW                   86%        $236.03                 $254.20                                 8%                                        5.4% 
   Howmet Aerospace Inc.         HWM                   80%         $65.97                  $68.80                                 4%                                        8.2% 
   Leonardo DRS Inc.             DRS                   83%         $22.93                  $23.83                                 4%                                        6.9% 

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02-28-24 1214ET

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