In this article, we will look at the 10 Undervalued Aerospace Stocks To Buy According to Analysts.
The International Aerospace and Defense industry
The aerospace and defense industry is a fast-growing industry, mainly because of the increased global travel after the pandemic and increased geopolitical tensions, which has led to increased government spending on defense. According to Research and Markets, the global aerospace and defense industry was valued at $884 billion in 2023. The industry is expected to grow at a compound annual growth rate of 5.8% to reach $1.23 trillion by 2028. Growth in the sector pertains to the rise in military modernization and increased defense spending. Whereas, increased spending on air travel is contributing to the growth in the commercial aerospace industry.
Geopolitics and Increased Spending on Defense
The world has been in a straight of turmoil, with geopolitical tensions leading to wars. While war and geo-political tensions are a dealbreaker for many industries, for the aerospace and defense companies the story is different. One of the key drivers of revenue for such companies is government contracts for military-grade aircraft, weapons, and defense systems. Thereby, with increased risks of war, defense spending goes up and aerospace and defense companies land more contracts.
According to a report by CNBC on April 22, global military spending hit an all-time high in 2023 after a 7% ramp-up. The global military spending was at a record high of $2.4 trillion last year. One of the key drivers of increased defense spending has been the prolonged Russia-Ukraine conflict and the recent tensions between Israel and Palestine. During the previous year the United States, China, and Russia were noted to be the biggest military spenders.
According to the U.S. Department of Defense, the government has $2.09 trillion in budgetary resources and plans to spend $972.88 Billion during 2024, out of which $229.80 billion is designated for award obligations. This indicates increased business opportunities for aerospace and defense companies during the year.
Upcoming Trends in the Aerospace Industry
According to a survey conducted by McKinsey & Company, AI-powered advancements can reshape aircraft maintenance, repair, and overhaul, however, companies need to accept the digital transformation.
Aircraft fleet management is a challenging sector. In the US alone, airline companies have witnessed a 15% increase in maintenance costs during the past 5 years. Moreover, there has been a 14% increase in flight delays due to maintenance.
The maintenance, repair, and overhaul (MRO) can be optimized using AI-powered solutions that allow better performance and improve efficiency. For Instance, AI-powered MRO can predict proper maintenance needs for an aircraft and the labor, material, and time needed for the maintenance. However, to leverage the power of AI, maintenance companies would have to become comfortable with adapting to new technologies and deal with the status quo disruption. The survey by McKinsey & Company found that only 33% of their respondents believed digital adoption to be critically important in achieving organizational objectives. Whereas 70% believed it could become critically important in the next 3 to 5 years, indicating hesitation towards immediate adoption of AI-powered solutions in the MRO sector.
Now that we have discussed the international aerospace and defense industry, let’s look at the 10 undervalued aerospace stocks to buy according to analysts.
An airplane hangar filled with components, showing the enormous scale of the company’s maintenance & overhaul services.
Our Methodology
To compile the list of 10 undervalued aerospace stocks to buy according to analysts we used the Finviz stock screener and iShares U.S. Aerospace & Defense ETF. We aggregated a list of stocks that operated in the aerospace and defense industry and filtered stocks that had a forward P/E ratio of less than 22 and a positive earnings growth rate. These stocks are cheaper than the market, which currently has a forward P/E of 22 (according to data from WSJ).
Once we had our filtered list, we ranked these stocks based on the average price target upside as per Wall Street analysts. The stocks are ranked in ascending order of the average price target upside as of August 15, 2024.
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10 Undervalued Aerospace Stocks To Buy According to Analysts
10. Northrop Grumman Corporation (NYSE:NOC)
Average Price Target Upside as of August 15: 1.39%
Forward P/E as of August 15: 20
Northrop Grumman Corporation (NYSE:NOC) is a leading aerospace and defense technology company, with a portfolio of Aeronautics Systems, Defence Systems, Mission Systems, and Space Systems. The defense premier company designs and manufactures an array of aerospace technology ranging from aircraft, and drone systems, to sophisticated satellites and missile systems. Its aviation technology and defense systems are sold to the US government and allies.
Defense and aerospace is a long-cycle business, where new products and projects can take years to generate revenue. However, Northrop Grumman Corporation (NYSE:NOC) has done well to align its business with the US government and its allies. The company has been developing the B-12 bomber and the Sentinel program, which is near completion and is expected to contribute significant growth.
Northrop Grumman Corporation (NYSE:NOC) posted a successful second quarter of 2024, with net sales increasing 7% year-over-year to $10.2 billion on the back of strong growth in all four segments. Aeronautics technology contributed the most to growth with net sales growing 14% year-over-year to reach $2.96 billion.
Not only has the company improved its net sales, but has a strong second-quarter backlog of $83.1 billion indicating sustained profitability. What’s more notable is Northrop Grumman Corporation’s (NYSE:NOC) ability to improve its operational income across all segments. The consolidated operating income for the quarter improved 5% to reach $1.1 billion.
As a result of improved performance across all business segments and a diverse portfolio of matured production programs ready to deliver revenue, the company has improved its 2024 guidance. Northrop Grumman Corporation (NYSE:NOC) now expects sales between $41.0 billion to $41.4 billion and adjusted EPS of $24.90 to $25.30.
Northrop Grumman Corporation (NYSE:NOC) is cheap at current levels. It is trading at 20 times its forward earnings, while the market forward P/E is 22. Moreover, the earnings of the company are also expected to grow 4% during the year to reach $6.48. 25 analysts have a consensus buy opinion on the stock with their 12-month median price target of $512 presenting an upside of 1.39% from the current level.
Carillon Eagle Growth & Income Fund stated the following regarding Northrop Grumman Corporation (NYSE:NOC) in its fourth quarter 2023 investor letter:
“Northrop Grumman Corporation (NYSE:NOC) pulled back in November following very strong performance in October that was tied to solid earnings and heightened geopolitical issues that included the war in Israel. While geopolitical issues remained front and center in November, tensions did not broaden to other areas through the end of the year.”
9. General Dynamics Corporation (NYSE:GD)
Average Price Target Upside as of August 15: 11.67%
Forward P/E as of August 15: 20
General Dynamics Corporation (NYSE:GD) is a prominent aerospace and defense company based in the United States. The company has grown to become one of the largest defense contractors in the world and operates through four main business segments including Aerospace, Marine Systems, Combat Systems, and Technologies. It sells its military-grade technologies to support national securities and military operations around the world.
The competitive edge of General Dynamics Corporation (NYSE:GD) lies in its diverse portfolio of products and its ability to grow its revenue by double digits while improving its operating margins. The company posted a strong second financial quarter of 2024. Its revenue increased 18% year-over-year to reach $11.98 billion driven by strong performance across all business segments.
The aerospace segment remained one of the key contributors to growth, with revenue growing a solid 51% year-over-year to reach $2.94 billion. Growth in this segment was backed by increased new aircraft deliveries coupled with higher service revenues. The company delivered 37 aircraft during the quarter, including 11 newly certified G700s.
What’s impressive about General Dynamics Corporation (NYSE:GD) is its robust performance in achieving higher operating margins, while growing its total order backlog to $91.3 billion. The company improved its operating earnings by 20.2% and operating margins by 20 bps year-over-year, indicating strong operational efficiency.
Is General Dynamics Corporation (NYSE:GD) currently undervalued?
General Dynamics Corporation (NYSE:GD) is one of the best undervalued aerospace stocks to buy according to analysts. It is trading at 20 times its forward earnings while the market average sits at 22. Moreover, its earnings are forecasted to grow by 28% during the year to reach $4.67. 27 analysts have a strong buy rating on the stock, with their 12-month median price target of $328 presenting an upside of 11.67% from the current level.
8. Leidos Holdings, Inc. (NYSE:LDOS)
Average Price Target Upside as of August 15: 13.68%
Forward P/E as of August 15: 16
Leidos Holdings, Inc. (NYSE:LDOS) is a leading technology company that provides defense, health, intelligence, and civil services technology to government agencies such as the Department of Defense and NASA, as well as international allies of the United States. The Defense Solutions segment provides advanced technology systems to support military operations across air, land, sea, space, and cyber security. Moreover, the company also provides air navigation systems to the Federal Aviation Administration and develops technologies that help control air traffic.
The strength of Leidos Holdings, Inc. (NYSE:LDOS) lies in its ability to drive strong organic growth and that too while maintaining high margins. During the second quarter of 2024, the company grew its revenue by 7.7% year-over-year to reach $4.13 billion. Although the revenue growth was backed by a robust performance across the board, however, the Health and Civil segment remained the strongest contender with revenue for the segment growing more than 22% year-over-year.
While revenue increase is impressive, what’s more notable is the company’s adjusted EBITDA margins which grew 260 base points to reach 13.5% during the quarter. Moreover, the adjusted EBITDA also increased to its record high of $559 million improving 33% from the previous year.
Management has been dedicated to delivering promises to its shareholders. It has significantly cut expenses and has stayed focused on robust cash flow. During the quarter Leidos Holdings, Inc. (NYSE:LDOS) generated a strong operating cash flow of $374 million and was able to maintain a strong liquidity position with more than $777,000 in cash and cash equivalents.
Leidos Holdings, Inc. (NYSE:LDOS) is cheap at current levels. It is trading at 16 times its forward earnings, which is a 12% discount to its sector. Moreover, its earnings are also forecasted to grow by 7% during the year to reach $2.12. 17 analysts have a strong buy rating on the stock, with their 12-month median price target of $167.5 presenting an upside of 13.68% from the current level.
Wedgewood SMID Cap Strategy made the following comment about Leidos Holdings, Inc. (NYSE:LDOS) in its Q1 2023 investor letter:
“Top performance detractors for the quarter include First Republic Bank, Texas Pacific Land, Leidos Holdings, Inc. (NYSE:LDOS), Helen of Troy and IAA. Finally, and unfortunately—as we’ve discussed in these letters previously in commentary on Leidos – it appears a new Cold War may be emerging, and we believe this will spur long-term demand for the U.S. military, industrial, and energy industries, as we already have seen on the energy front, especially, with exports to European allies rising significantly since Russia’s invasion of Ukraine.”
