We recently compiled a list of the 10 Best Aerospace and Defense Stocks to Buy Now. In this article, we are going to take a look at where Woodward, Inc. (NASDAQ:WWD) stands against the other aerospace and defense stocks.
The world has been rocked with conflict over the last few years. The war between Russia and Ukraine has gone beyond 860 days, with no immediate end in sight. Azerbaijan and Armenia continue to engage in a regular exchange of fire after the latter lost control of the Nagorno-Karabakh region to the Azeris in 2020. The Middle East is up in flames, with defense experts describing the ongoing Israel-Hamas conflict as the worst crisis in the region since the Arab-Israeli War in 1973.
While the human impacts of war are undeniably tragic, it is also a time when defense companies make money and lure investors into loading up on their stocks. According to a report on CNN earlier this year, defense companies in the United States and Europe have thrived since Russia invaded Ukraine in February 2022. German automotive and arms manufacturer Rheinmetall’s share price had surged by a staggering 315% in two years following the start of the conflict, while BAE Systems posted a 105% gain. Northrop Grumman and Lockheed Martin also witnessed an increase in their share prices by 18% and 10%, respectively.
When the war broke out, industry analysts expected the aerospace sector to be affected by western sanctions placed on Russia. According to KPMG, the country is the source of 30% of the titanium used by Boeing and other large engine producers that power fighter jets and commercial aviation. Titanium is a key material that goes into the development of jet fan blades and landing gears. However, the supply of titanium from Russia to these companies has largely remained unaffected despite sanctions.
While sharing his insights on commercial aviation at the Morningstar Investment Conference in Chicago on June 26, Tony Bancroft from Gabelli Funds said that he had noticed a significant growth in aircraft orders lately, with both Airbus and Boeing having a 12-year backlog of orders. He believes there are three reasons driving it. The first catalyst, according to him, 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. Another critical factor he cited during his talk was that business travel has finally returned to the 2019 pre-pandemic level. Lastly, Tony highlighted the 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.
Furthermore, Bancroft identified Textron as his hot stock pick in the aerospace and defense industry. He believes the stock is undervalued at its current share price of $85, and anticipates its value to hover around the $125 range in the future. Last year in March, the US Department of Defense (DoD) awarded a $1.3 billion contract to the company to develop helicopters to replace the aging Blackhawk fleet.
Another top stock that hedge funds are talking about is Carpenter Technology Corporation, a leading supplier of specialty alloys that holds a market share of roughly 40% in the aerospace industry. It was among the top picks during the Sohn Investment Conference in New York back in April. Mohammed Anjarwala, the managing director of Advent Global Opportunities, shared the following remarks about the company during the conference:
We think Carpenter is one of the best ways to play the growing backlog of planes at Boeing and Airbus, as they ramp up their billing rates.
At the time of the conference, the stock was trading at around $70 per share. Anjarwala forecasted that the value could go up to around $200 per share or 20 times forward P/E. It is currently valued at $107 per share.
Methodology
Insider Monkey’s database of 920 hedge funds was assessed, as of the first quarter of 2024. We have chosen the 10 best aerospace and defense stocks to buy now based on the hedge fund sentiment towards each stock. The stocks are ranked in ascending order of hedge fund holders in each company.
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).
A close-up of a fuel pump operated by a robotic arm, symbolizing the company’s technology-driven industrial solutions.
Woodward, Inc. (NASDAQ:WWD)
Number of Hedge Fund Holders: 37
Woodward, Inc. (NASDAQ:WWD) is an aircraft engineering company that provides solutions and sells control system components for aircraft engines, industrial engines, turbines, power generation, and mobile industrial equipment. Founded in Illinois in 1870, the billion-dollar company today has a presence worldwide, including in China, Japan, and Europe. During the second quarter of 2024, the company reported its EPS at $1.62 per share, smashing analyst expectations of $1.28. Woodward, Inc. (NASDAQ:WWD) generated earnings of $98 million in its aerospace segment – which was 34% higher YoY and driven primarily by net price realization and an increase in aircraft utilization to cater to the growing demand for travel.
Besides the general interest among buyers in the company’s aerospace parts, strong financial results during the last quarter were also significantly contributed by the growing demand for on-highway natural gas trucks and bus powertrains in China. The industrial segment generated quarterly revenue of $338 million, up from $281 million, resulting in $65 million in earnings for the quarter. However, the company expects on-highway sales in China to slow down during the third quarter, and not grow at the same pace as they have in the last several quarters, due to China’s changing market dynamics. The effects of that were observed when investors lost 3.5% during the last week of June, but it could be argued that the hiccup was offset by longer-term gains.
Woodward, Inc. (NASDAQ:WWD)’s share price has grown by over 47% last year. This year alone, it has attracted investments from notable financial institutions such as Baader Bank AG and Quest Partners LLC, reflecting continued investor confidence. Woodward, Inc. (NASDAQ:WWD) over the years has also earned the reputation of being a leader in energy conservation in the aerospace and industrial markets, with a focus on building a decarbonized, cleaner, and sustainable world. As part of this process, it has forged strategic partnerships with companies like Airbus and Rolls Royce to work on projects such as developing Fuel Cell Balance of Plant (BoP) and methanol engines to reduce greenhouse gas emissions. The company can build on this positive reputation to further drive sales and attract investments.
According to Insider Monkey, 37 hedge funds are bullish about the stock. There is also consensus among analysts over the Buy rating of the stock, with an average share price target of $178, an upside of 0.74%. The company’s management is optimistic about the overall performance during the fiscal year. Chief Financial Officer, Bill Lacey, shared the following remarks in Woodward, Inc. (NASDAQ:WWD)’s Q2 2024 Earnings Call:
“For fiscal 2024, Aerospace sales growth is now expected to be 12% to 14% and segment earnings are still expected to be 18% to 19% of sales. For fiscal 2024, we now expect industrial sales growth to be 13% to 15% and segment earnings to be 17% to 18% of segment sales. At the Woodward level, the adjusted effective tax rate is now expected to be approximately 20%. We expect adjusted free cash flow to now be between $325 million and $375 million. Capital expenditures are still expected to be approximately $100 million. Adjusted earnings per share is now expected to be between $5.70 and $6 based on approximately 62 million fully diluted weighted average shares outstanding.”
Overall WWD ranks 10th on our list of the best aerospace and defense stocks to buy. You can visit 10 Best Aerospace and Defense Stocks to Buy Now to see the other aerospace and defense stocks that are on hedge funds’ radar. While we acknowledge the potential of WWD as an investment, 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 WWD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.