Zacks Industry Outlook Highlights: Lockheed Martin, Engility Holdings, Teledyne Technologies, Hexcel and Spirit AeroSystems Holdings

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Dec 22, 2014, 09:30 ET

CHICAGO, Dec. 22, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Aerospace-Defense (Part 2), including Lockheed Martin Corp. (NYSE:LMT-Free Report), Engility Holdings, Inc. (NYSE:EGL-Free Report), Teledyne Technologies Inc. (NYSE:TDY-Free Report), Hexcel Corp. (NYSE:HXL-Free Report) and Spirit AeroSystems Holdings, Inc. (NYSE:SPR-Free Report).

Industry: Aerospace-Defense (Part 2)

Link: http://www.zacks.com/commentary/36228/defense-majors-step-up-foreign-sales-to-weather-sequester

Rising geopolitical tensions along with rapid economic growth in emerging markets have pushed up demand for U.S. weapons exports to an all-time high, eventually benefiting the U.S. defense manufacturers.

Given the budget challenges, the defense primes are working on (i) how to grow profitably from diminishing budgets and (ii) slash costs for maintaining a satisfactory financial condition.

Next-generation technology: At the macro level, there has been a gradual shift in defense spending patterns. In response to asymmetric terrorist threats, the emphasis appears to have shifted to high-tech intelligence equipment, replacing demand for conventional big guns and heavy armor.

The major industry players have, in response, resorted to bolt-on acquisitions to plug gaps in their product offerings. A focus on R&D is also helping these companies to develop next generation technologies essential in a climate of fewer programs and reduced budgets.

Defense companies will increasingly be required to come up with next generation intelligence, surveillance and reconnaissance (ISR) technologies. The contractors specializing in space systems will continue to gain from the Pentagon's increasing focus on its space division to counter emerging security threats.

Given the vital role played by satellites in the military space, Pentagon's prime contractor and the world's largest defense company Lockheed Martin Corp. (NYSE:LMT-Free Report) is looking to bolster its satellite product coverage by increasingly investing in R&D and acquisitions. Although Lockheed ran up against F-35 glitches earlier this year, this program will definitely trigger significant top-line generation for the company. The recent defense spending bill for fiscal 2015 (beginning Oct. 1) includes 38 new F-35 fighters.

Foreign Military Sales (FMS): The big defense operators are also expanding their operations through acquisitions and foreign orders. FMS remains the key tool for boosting their top line. The ongoing Iraqi civil war, escalating tensions in Eastern Europe and demand for defense products in the Middle East and other Asian nations keep alive the hopes for this sector. A number of emerging markets as well as nations such as India, Japan, the United Arab Emirates, Saudi Arabia and Brazil are increasing defense spending and generating business for the U.S. aerospace and defense companies.

In fiscal 2014, U.S. military sales to its allies stood at $34.2 billion, according to the Defense Security Cooperation Agency. This marked a slight uptick from approximately $30 billion in sales in fiscal 2013.

Although sequestration casts a shadow of uncertainty on long-term funding for periods beyond fiscal 2015, if we are to pick the top defense stocks from the aerospace/defense sector for the near term, it would be Boeing, Engility Holdings, Inc. (NYSE:EGL-Free Report) and General Dynamics. These three stocks carry a Zacks Rank #2 (Buy).

In the aerospace/defense equipment industry, we are positive on Teledyne Technologies Inc. (NYSE:TDY-Free Report), Hexcel Corp. (NYSE:HXL-Free Report) and Spirit AeroSystems Holdings, Inc. (NYSE:SPR-Free Report). While Teledyne Technologies and Spirit AeroSystems sport a Zacks Rank #1 (Strong Buy), Hexcel carries a Zacks Rank #2.

Bottom Line

It is evident that the defense sector is playing well combating the budget austerity through various avenues. In the end they're growing profitably and lifting their outlook. But what about investing in the space right now – will the opportunities outweigh the risks to lure in short-term investors?

Check out our latest "Will a Rebounding US Economy Breathe New Life into Defense?" for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.

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