This article looks at the 11 undervalued aerospace stocks to buy according to hedge funds.
According to a new report published by risk intelligence company, Verisk Maplecroft, the number of conflict zones worldwide has increased by nearly two-thirds over the past three years, with wars and unrest intensifying. Ukraine, the Middle East, and parts of Africa have been the most affected regions, with no immediate end to most conflicts in sight.
READ ALSO: 8 Best Small Cap Defense Stocks to Buy Now and 8 Best Military Drone Stocks To Buy According to Analysts.
On November 19, Kyiv marked 1,000 days since the Russian invasion in early 2022. The Middle East is in flames, in what is being described by defense experts as the region’s worst crisis since the Arab-Israeli War in 1973, with the battle spreading from Gaza to Lebanon in continuation of Israel’s response to the October 2023 Hamas-led attack on the country.
While the human impact of these conflicts has been tragic, aerospace companies in the defense sector have profited as demand for fighter jets and autonomous aerial vehicles surged. Several notable contractors have thrived over the last two years, with substantial gains in their share price, as countries rushed to bolster their air defense. An aerospace and defense ETF issued by iShares had gained over 20% year-to-date as of the close of day on December 6.
When the war in Ukraine broke out, industry experts anticipated that Western sanctions on Russia would impact the aerospace sector. The country was the source of around 30% of the titanium used by major engine makers to power fighter jets and commercial aviation. However, the supply of this key material from Russia has largely remained unaffected.
Additionally, the commercial aerospace sector is also showing signs of resurgence as international travel returns to pre-pandemic levels. While sharing his insights on commercial aviation at the Morningstar Investment Conference in Chicago in June, Tony Bancroft from Gabelli Funds stated that he had noticed a significant growth in aircraft orders, with two major manufacturers having a 12-year backlog of orders.
He believes three reasons are driving it. The first catalyst is China, which accounts for 20% of the growth in orders to cater to the growing middle class in both China and India, who want to travel more. The second critical factor he cited was business travel returning to the 2019 pre-pandemic level. Lastly, Bancroft highlighted the rising middle class in the United States, and the world, which is increasing air travel and contributing to the economic growth in the industry.
With that said, let’s now shift focus and discuss the top undervalued aerospace stocks to buy according to hedge funds.
A complex assembly line producing aircraft structures for aerospace applications.
Methodology
We sifted through screeners to identify stocks in the aerospace and defense industry with a forward price-to-earnings ratio of under 25 as of Friday, November 29, 2024, the close of the day. From there, we selected the 11 aerospace stocks with the highest number of hedge fund investors, based on Insider Monkey’s database of over 900 prominent hedge funds as of Q3 2024. The 11 undervalued aerospace stocks to buy have been ranked in ascending order based on the number of hedge funds holding stakes in them.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
11 Undervalued Aerospace Stocks To Buy According to Hedge Funds:
11. Ducommun Incorporated (NYSE:DCO)
Forward Price to Earnings Ratio: 17.34
Number of Hedge Fund Holders: 13
Ducommun Incorporated (NYSE:DCO) provides manufacturing solutions to customers in the global aerospace, defense, military, space, and industrial markets. It has two segments: the Electronic Systems segment, which designs and manufactures high-reliability electronic and electromechanical products, and the Structural Systems segment, which builds contoured aerostructure components and assemblies.
Ducommun Incorporated (NYSE:DCO) sells its products and services to commercial customers and government agencies. On November 9, the company announced financial results for the third quarter of fiscal year 2024. Revenue was posted at $201.4 million, up 2.6% from last year. This was the first instance of revenue crossing the $200 million mark for the company, driven by impressive growth in commercial aerospace, military, and space sectors.
DCO’s commercial aerospace revenue grew 3% year-over-year, marking the 13th quarter of revenue growth in its commercial aerospace business. During the Q3 earnings call, CEO Steve Oswald stated that the company saw excellent growth in its A220 and A320 programs.
Military and space revenue surged 6% from last year, fueled by strong performances in its radar, electronic warfare, and missile programs. Ducommun Incorporated (NYSE:DCO)’s defense revenue has been over $100 million for the last four out of five quarters.
In April this year, Ducommun Incorporated (NYSE:DCO) was awarded two major contracts worth over $50 million for the Raytheon SPY-6 family of radar systems. These include a $25 million follow-on order for one circuit card assembly already in production and a new $25 million order for another. Later in June, Raytheon awarded the company a $12 million order for the TOW missile system.
Northrop Grumman emerged as DCO’s second-largest customer in terms of revenue in Q3, up 100% from last year to $17 million. This has raised investor confidence and resulted in a bullish sentiment around the stock, as the company looks to build scale at defense giants outside of RTX.
Wall Street analysts have a consensus Strong Buy rating for the stock, with an average share price upside potential of 10%. As of Q3 2024, 13 hedge funds tracked by Insider Monkey had investments in the company. Considering its low forward P/E ratio, DCO is among the top undervalued aerospace stocks to buy according to hedge funds.
10. AAR Corp. (NYSE:AIR)
Forward Price to Earnings Ratio: 17.73
Number of Hedge Fund Holders: 18
AAR Corp. (NYSE:AIR) is an American company that provides global aerospace and defense aftermarket solutions to commercial and government customers. It has operations in over 20 countries.
The company is considered among the industry leaders in airframe MRO. In September this year, the U.S. Navy’s Naval Air Systems Command (NAVAIR) awarded AAR a five-year contract valued at $1.2 billion to perform depot airframe maintenance for the P-8A Poseidon aircraft fleet, and also provide depot field team support for the Navy, the government of Australia, and other customers of foreign military sales.
AAR Corp. (NYSE:AIR) has had a robust start to fiscal 2025. During its recent Q1 earnings call on September 23, the company reported revenue of $662 million, rising 20% from last year, driven by strong growth in its commercial and government businesses, which both grew 20%. Operating margins improved by 180 basis points year-over-year to 9.1% from 7.3%. Adjusted diluted EPS increased from $0.78 to $0.85 during the quarter.
The company anticipates a sales growth of 18% to 22% in Q2, with operating margins expected to be similar to Q1. The hanger capacity expansions in Miami and Oklahoma City are on track for operation beginning in the second half of the calendar year. These are projected to add around $60 million to annual sales. AAR Corp. (NYSE:AIR) is also buoyed by the new engine and parts supply contracts, which are expected to contribute to revenue and income growth.
According to Insider Monkey’s database for Q3 2024, 18 hedge funds held investments in the company. Wall Street analysts have a consensus Strong Buy rating for the stock, with an average share price upside potential of 15.25%. AAR Corp ranks tenth in our list of the best aerospace stocks.
9. V2X, Inc. (NYSE:VVX)
Forward Price to Earnings Ratio: 12.74
Number of Hedge Fund Holders: 21
V2X, Inc. (NYSE:VVX) is a leading provider of critical mission solutions and support services to defense clients in over 50 countries and territories. Its aerospace solutions provide the engineering, facilities, and skilled resources required to sustain systems and platforms. The stock has surged by over 33.2% since the start of 2024, which makes it one of the best aerospace stocks.
The aerospace and defense company has secured several recent contracts, with a combined value of around $5 billion, bolstering its market position. In August, V2X, Inc. (NYSE:VVX) was awarded a $747 million contract for the maintenance of the F-5 aircraft fleet, which has a crucial role in training naval pilots.
Earlier in the year, the company also received a five-year aviation support and training contract from Saudi Arabia’s Ministry of National Guard. The contract was valued at $400 million. Contracts such as these not only strengthen V2X, Inc. (NYSE:VVX)’s revenue stream but also demonstrate its ability to secure long-term, high-value agreements in the aerospace and defense sector.
On November 4, the company announced financial results for the third quarter of 2024 and reported revenue of $1.08 billion, up 8% from last year, driven by significant revenue growth in the Indo-Pacific and the Middle East. Adjusted EBITDA stood at $82.7 million, growing by 28% year-over-year, fueled by robust growth and improved productivity. V2X, Inc. (NYSE:VVX) ended Q3 with a backlog of $12.2 billion, representing substantial revenue visibility.
Wall Street analysts have a consensus Buy rating for the stock and project a 20.48% upside, on average, in its share price. Impressive financial performance and a series of fresh contracts have also boosted investor confidence. According to Insider Monkey’s database for Q3 2024, 21 hedge funds held a stake in the company, up from 16 at the end of the second quarter.
Considering its low forward P/E ratio, V2X, Inc. (NYSE:VVX) is among the top picks in our list of undervalued aerospace stocks to buy according to hedge funds.
8. Astronics Corporation (NASDAQ:ATRO)
Forward Price to Earnings Ratio: 20.06
Number of Hedge Fund Holders: 22
Astronics Corporation (NASDAQ:ATRO) is an American company providing advanced technologies to global aerospace, defense, and electronics clients. Some of its offerings include lighting and safety systems, aircraft electronics integration, automated test systems, and distribution and motion systems, among other products and services.
On November 6, the company declared financial results for the third quarter of fiscal 2024. Sales grew 25% from last year to $203.7 million, the highest quarterly revenue since the first quarter of 2019. Adjusted EBITDA was posted at $27 million, representing 13% of sales. This was a 207% year-over-year increase, driven by a strong performance by the aerospace segment.
Sales increased by 24.9% for the aerospace segment, which accounts for 88% of the business, to $177.6 million, with growth fueled by commercial transport sales. Astronics Corporation (NASDAQ:ATRO) witnessed increased demand from airlines for inflight entertainment and connectivity products.
Military sales for the quarter were $21.7 million, up 30% compared to last year, driven by progress on the Future Long-Range Assault Aircraft (FLRAA) program. In August 2023, Astronics Corporation (NASDAQ:ATRO) was selected by Bell to support the development of the V-280 Valor for the American Army. The company has supplied Bell with electrical power and distribution systems for the demonstrator aircraft for several years.
Astronics Corporation (NASDAQ:ATRO) is encouraged by strong demand and is entering the fourth quarter with a backlog of $612 million. This sets it up for continued improvements in financial results toward the end of the year and the beginning of 2025. Wall Street analysts anticipate a share price upside potential of 23% for ATRO. Considering its low forward P/E ratio and 22 hedge funds, amongst those tracked by Insider Monkey, having a stake in the company, it is among the best aerospace stocks to invest in.
7. Embraer S.A. (NYSE:ERJ)
Forward Price to Earnings Ratio: 22.08
Number of Hedge Fund Holders: 25
Embraer S.A. (NYSE:ERJ) is a Brazilian aerospace company that manufactures aircraft for commercial and executive aviation, defense, and security purposes. It is the third-largest maker of civil aircraft in the world.
Robust demand for Embraer’s executive jets is one of the major drivers for its growth. The company has delivered 86 aircraft this year and is on track to meet its delivery forecast of 125 to 135 jets for the full year. It delivered 41 of these during its most recent quarter (Q3 2024), comprising 22 light jets and 19 medium jets. This was the best quarter for the segment in terms of revenue and deliveries, demonstrating sustainable demand across the business jets portfolio.
Embraer S.A. (NYSE:ERJ) Defense & Security business is also booming. Revenue for the division has expanded 56% during the first nine months of fiscal 2024. Some recent highlights include the deliveries of C-390 Millenium to Hungary and Brazil and orders received for the aircraft from the Netherlands and Austria. ERJ has also received fresh contracts from Paraguay and Uruguay to acquire the A-29 Super Tucanos.
Embraer (NYSE:ERJ) is also making advancements in electric aviation, especially in the development of electric vertical takeoff and landing (eVTOL) aircraft, which is considered to be the next step in the future of urban air mobility.
Wall Street analysts are bullish on the stock, with a consensus Buy rating. As per Insider Monkey’s database for Q3 2024, 25 hedge funds held a stake in the company, making Embraer one of the best aerospace stocks to invest in.
6. Textron Inc. (NYSE:TXT)
Forward Price to Earnings Ratio: 13.24
Number of Hedge Fund Holders: 31
Textron Inc. (NYSE:TXT) is an American conglomerate that manufactures products for consumers across several industries, including aerospace and defense, specialized vehicles, fuel systems, and turf care. It operates within six business segments: Bell, Textron Aviation, Textron eAviation, Textron Systems, Industrial, and Finance.
In November, the U.S. Department of Defense (DoD) awarded Textron Aviation a $277 million contract to produce the T-54A trainer aircraft for the U.S. military. Under the contract, a total of 26 aircraft are expected to be delivered to the Navy, Marine Corps, and Coast Guard, with an estimated completion date of September 2026.
Earlier in the year in May, the U.S. Army selected Textron Systems for the Future Tactical Uncrewed Aircraft System (FTUAS) Option 3 and Option 4 award, under which Textron will complete flight and MOSA demonstrations and deliver an Aerosonde Mk. 4.8 Hybrid Quad (HQ) uncrewed aircraft system (UAS) to the Army for testing and evaluation.
Despite a four-week strike that impacted the aviation industry during Q3, the company generated a revenue of $3.4 billion, up 3% year-over-year. Net income from continuing operations dipped slightly to $1.40 per share, from $1.49 in Q3 2024. Bell registered strong growth in revenue during the quarter, while the FLRAA program’s progression substantially increased the company’s backlog. Textron Inc. (NYSE:TXT) also returned $215 million to shareholders through share repurchases during Q3.
These positive developments have resulted in a general bullish sentiment around Textron Inc. (NYSE:TXT). Wall Street analysts have a consensus Buy rating for the stock, with an average share price upside potential of 23%. Textron is one of the best undervalued aerospace stocks to buy according to hedge funds.
5. L3Harris Technologies, Inc. (NYSE:LHX)
Forward Price to Earnings Ratio: 17.18
Number of Hedge Fund Holders: 40
L3Harris Technologies, Inc. (NYSE:LHX) is an American defense company, known for its wireless and night vision equipment, command and control systems, avionics, and terrestrial and spaceborne antennas. It was formed in 2019 after a merger between Harris Corporation and L3 Technologies.
In June, the company received a $34 million contract from the United States Air Force to modernize the B-52 Stratofortress bomber by consolidating the functions of the electronic warfare officer and navigator into one position. Earlier in the year, L3Harris Technologies, Inc. (NYSE:LHX) was awarded a $919 million contract to design and build satellites for the Space Development Agency to provide missile warning coverage. High-value contracts such as these demonstrate the company’s significance in the aerospace and defense industry.
On October 25, L3Harris Technologies, Inc. (NYSE:LHX) announced financial results for the third quarter of 2024. Revenue was posted at $5.3 billion, up 8% from last year. Operating margins increased by 70 basis points to 15.7%, driven by continuing program executions and strong operational performance, with significant contributions from LHX NeXt. Non-GAAP diluted EPS was $3.34, growing 5% year-over-year.
The company is witnessing strong demand across the board, with total awards of over $7 billion in Q3. This included two contracts for the Navy – a $600 million next-generation jammer contract and a $1.2 billion IDIQ contract to support the P-8A Poseidon fleet. These awards have resulted in LHX having a book-to-bill ratio of 1.4, with all business segments delivering a ratio of at least one. The company’s backlog has reached a record $34 billion.
After robust results in Q3, L3Harris Technologies, Inc. (NYSE:LHX) has raised its guidance for the full year. It now expects an annual revenue between $21.1 million and $21.3 billion, with a segment operating margin of 15.5%. EPS is anticipated to be in the range of $12.95 to $13.15 per share. Wall Street analysts have a consensus Buy rating for the stock, with an average share price upside potential of over 16%.
As per Insider Monkey’s database for Q3 2024, 40 hedge funds held a stake in the company. This, coupled with its low forward P/E ratio, makes L3Harris Technologies, Inc. (NYSE:LHX) one of the top undervalued aerospace stocks to buy according to hedge funds.
4. General Dynamics Corporation (NYSE:GD)
Forward Price to Earnings Ratio: 17.73
Number of Hedge Fund Holders: 48
General Dynamics Corporation (NYSE:GD) is a leading global aerospace and defense company, operating through its Aerospace, Marine Systems, Combat Systems, and Technologies segments. With a YTD return of over 5%, GD is one of the best aerospace stocks on our list.
During its recent Q3 earnings call on October 23, the company reported a $1.1 billion, or 10.4%, increase in revenue from last year to $11.67 billion. The surge was driven by strong performances by its Aerospace and Marine Systems segments, which grew 20% and 22%, year over year, respectively.
The Aerospace segment, which produces Gulfstream business jets, generated $2.48 billion in revenue during the quarter. Operating margin stood at 12.3%, around one percentage point lower than last year. The growth in segment revenue was attributed to higher service center and special missions volume and higher FBO and MRO volume, especially in the Asia Pacific region at Jet Aviation.
The Marine Systems segment posted revenue of $3.6 billion, up by $597 million from last year, with the Columbia-class shipbuilding and Virginia-class volume fueling growth. Sales figures for Combat Systems remain relatively flat, but the company is witnessing strong demand in the segment, with its backlog of orders now at $18 billion.
Ongoing conflicts in the Middle East and Ukraine, coupled with Washington’s quest to replenish inventories, have increased demand for weapons and other military equipment. With no immediate end to the wars in sight, General Dynamics Corporation (NYSE:GD) is projected to continue making gains.
Wall Street analysts have a consensus Buy rating for the stock and anticipate a share price upside potential of nearly 20%. As per Insider Monkey’s database for Q3 2024, 48 hedge funds held a stake in the company. GD is one of the best undervalued aerospace stocks to buy according to hedge funds.
3. Northrop Grumman Corporation (NYSE:NOC)
Forward Price to Earnings Ratio: 17.57
Number of Hedge Fund Holders: 48
Northrop Grumman Corporation (NYSE:NOC) is one of the largest defense contractors in the world. The company is the manufacturer of the B-21 Raider for the United States Air Force (USAF), which was formally unveiled in December 2022. The long-range, stealth strategic bomber, intended to replace the aging B-1B Lancer and B-2 Spirit, is scheduled to enter service from mid-2020s onwards.
The company is also a leading player in autonomous aerial systems. It is the maker of the RQ-4 Global Hawk, noted for its surveillance and intelligence operations in Afghanistan, Iraq, and parts of North Africa. In April this year, NOC was awarded a $387 million contract to sustain Italy, Japan, and South Korea’s RQ-4 Global Hawk drones. Moreover, NOC’s MQ-4C Triton unmanned aerial vehicle, currently operated by the United States and Australia, has immense export potential and has received interest from NATO and Norway.
On October 24, Northrop Grumman Corporation (NYSE:NOC) announced financial results for the third quarter of fiscal 2024. The company generated sales of $10 billion, up 2% compared to the third quarter of 2023, driven by a surge in demand for advanced weapons amid intense escalations in the Middle East and the Ukraine-Russia war.
Aeronautics Systems revenue grew 4% year-over-year to $2.9 billion, with gains attributed to higher F-35, E2, and Triton volumes. Sales at Defense Systems surged by 2% due to higher sales of Sentinel and other weapons from NOC’s portfolio. Mission Systems also registered a 7% increase in sales, fueled by a higher volume of microelectronics and advanced technology programs. As a result, Northrop Grumman Corporation (NYSE:NOC) posted an EPS of $7, smashing estimates of $6.08 per share.
Wall Street analysts have a consensus Buy rating for NOC and anticipate a 17.5% upside in its share price. It is among the top undervalued aerospace stocks to buy according to hedge funds.
2. Lockheed Martin Corporation (NYSE:LMT)
Forward Price to Earnings Ratio: 18.62
Number of Hedge Fund Holders: 58
Lockheed Martin Corporation (NYSE:LMT) is the largest defense contractor in the world. In fiscal 2023, it generated over $67 billion in revenue, of which 96% came from defense-related sales.
It is the maker of the famed F-35 fifth-generation fighter jet. For the last several decades, the company has also been delivering advanced autonomous solutions to the U.S. military to meet the needs of its most demanding missions.
Geopolitical tensions in different parts of the world have positioned LMT for continued growth as it is the partner of choice for most American allies. Donald Trump’s victory in the 2024 presidential elections has also raised hopes of increased defense spending, as military expenditure reached record highs during his first stint as president.
According to a recent report in the Financial Times, Taiwan is considering a request to purchase 60 F-35 fighter jets from Lockheed Martin Corporation (NYSE:LMT) to signal the incoming U.S. administration its seriousness about protecting itself from China. People familiar with the matter also told the newspaper that Taipei’s big package of US weapons could also include the Aegis destroyer.
LMT’s financial performance remains impressive. During its recent Q3 2024 earnings call on October 22, the company reported net sales of $17.1 billion, up 1.2% year-over-year, driven by robust performances from the Missiles and Fire Control, and Rotary and Mission Systems segments. Net earnings totaled $1.6 billion, translating to an EPS of $6.80 per share, which beat expectations of $6.54, and was seven cents higher than in the same period last year.
Lockheed Martin Corporation (NYSE:LMT) is also a strong dividend payer. Considering its future cash generation prospects, the Board recently decided to raise the quarterly dividend by 5% to $3.30 per share. This is the 22nd successive year of dividend growth. Investor sentiment around the stock continues to improve. According to Insider Monkey’s database for Q3 2024, 58 hedge funds had investments in the company, up from 56 at the end of the second quarter.
Wall Street analysts are also bullish on the stock, with a consensus Buy rating and forecasting a 21% upside potential in its share price. Considering its low forward P/E ratio, LMT is one of the top undervalued aerospace stocks to buy according to hedge funds.
1. RTX Corporation (NYSE:RTX)
Forward Price to Earnings Ratio: 20.33
Number of Hedge Fund Holders: 72
RTX Corporation (NYSE:RTX) is a giant in the global aerospace and defense industry. It provides systems and services to commercial, military, and government clients. The company operates through three main businesses: Collins Aerospace, Pratt & Whitney, and Raytheon.
It has been awarded several critical, high-value contracts in the last few months, raising investor confidence. These include a $736 million contract it received in October from the U.S. Navy to produce AIM-9X SIDEWINDER missiles. More recently, on December 5, the company announced a $590 million production contract from the Navy for the Next Generation Jammer Mid-Band (NGJ-MB) system.
RTX is also an important player in the global drone market. In October, it showcased its anti-drone capabilities to the U.S. Army in Arizona, where its Coyote Block 2 and Block 3 effectors and Ku-band Radio Frequency Sensor (KuRFS) successfully passed stress tests as part of the Army’s counter-drone solution.
On October 22, RTX Corporation (NYSE:RTX) reported financial results for Q3 2024. It generated a revenue of $20.1 billion, growing 6% from last year. The surge was driven by an 11% growth in commercial aftermarket sales, on top of the 25% rise last year driven by the growth in global air travel. Defense-related sales were up 10% during the quarter. Adjusted EPS was logged at $1.45, rising 16% from last year, and beating expectations of $1.34 per share.
RTX Corporation (NYSE:RTX) ended Q3 with a backlog of $221 billion, comprising $90 billion of defense and $131 billion worth of commercial orders. Wall Street analysts have a consensus Buy rating for the stock, with a share price upside potential of over 11%.
Hedge fund sentiment about the company has improved substantially. According to Insider Monkey’s database for Q3 2024, 72 hedge funds had investments in the company, up from 54 at the end of the second quarter.
Overall, RTX ranks first among the 11 Undervalued Aerospace Stocks To Buy According to Hedge Funds. While we acknowledge the potential of aerospace companies, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RTX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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