Global tensions are on the rise, and as a result, the defense sector is becoming increasingly attractive to investors. The escalating conflicts between nations, including the United States and China, as well as ongoing issues in the Red Sea, are generating potential for new government contracts. This is, in turn, boosting certain stocks within the industry.
When deciding which stocks to invest in within this sector, two key factors should be considered: earnings growth and price targets set by financial analysts. The market tends to favor stocks that promise above-average growth rates. Understanding these two factors is essential. As the old financial adage goes, “Don’t fight the market.”
Boeing (NYSE:BA), the manufacturer of the 737 MAX jet, recently experienced a significant stock price decline of nearly 20% following a controversial incident involving a flight with Alaska Air Group (NYSE:ALK). However, the situation may not be as dire as it seems.
The incident involved a 737 MAX 9 jet, a product line that contributes minimally to Boeing’s revenue and represented 0% of new orders last quarter. According to Boeing’s investor relations website, all new orders to be delivered this year, which will be recognized as revenue/earnings, are comprised of MAX 8 and MAX 10 jets. No orders were affected by the MAX 9 incident.
This suggests that the market’s negative reaction to the incident may not be as damaging as initially thought. After all, 100% of the orders fall outside this event. This could explain why analysts project an EPS growth rate of up to 197% in the next 12 months.
The market’s willingness to pay an elevated price-to-earnings ratio of 76.7 times for Boeing’s stock may be due to this projected growth. As the saying goes, “It must be expensive for a reason.”
Spirit AeroSystems Holdings (NYSE:SPR), a leading supplier for Boeing and the industry at large, is another stock to watch. With Boeing’s orders secured, production needs to be ramped up to meet delivery deadlines. This bodes well for Spirit AeroSystems, which is unlikely to face issues with booking revenue and earnings.
Despite negative media headlines, the outlook for Spirit AeroSystems is positive. Analysts have released their EPS projections for the next 12 months, which sit at a substantial 320%. The stock is currently priced at a high 60.3 times P/E ratio, indicating that the market and analysts are confident in these projections.
Kratos Defense (NASDAQ:KTOS) is another stock to consider. As a manufacturer of drone and unmanned aircraft units, as well as artificial intelligence and surveillance capabilities, Kratos is well-positioned to dominate the next generation of defense and aerospace equipment.
The landscape of global defense and military has shifted. It’s no longer about the size of the army, but the sophistication of the technology. With its $2.7 billion market capitalization, Kratos could be a valuable addition to the portfolios of larger players. Analysts project an EPS growth of 48.2% in the next 12 months, well above the industry-average expected growth of 18.4%. Their price targets of $21.3 a share also reflect a net upside of 14.8% from today’s prices.
In conclusion, despite the volatility of global conflicts, there are promising investment opportunities within the aerospace and defense sector. Stocks like Boeing, Spirit AeroSystems, and Kratos Defense are poised to dominate the industry, offering potential high returns for savvy investors.
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