We recently compiled a list of the 10 Undervalued Aerospace Stocks To Buy According to Analysts. In this article, we are going to take a look at where L3Harris Technologies, Inc. (NYSE:LHX) stands against the other undervalued aerospace stocks.
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.
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.
At Insider Monkey we are obsessed with 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 military jetfighter against a deep blue sky with the sun behind it.
L3Harris Technologies, Inc. (NYSE:LHX)
Average Price Target Upside as of August 15: 13.69%
Forward P/E as of August 15: 17.5
L3Harris Technologies, Inc. (NYSE:LHX) is an advanced technology company that operates in the aerospace and defense industry. The company focuses on key business segments including, Integrated Mission Systems, Space and Airborne Systems, Communication Systems, and Aerojet Rocketdyne. L3Harris Technologies, Inc. (NYSE:LHX) sells its technologies to governments and private customers around the globe.
The company posted a successful second quarter of 2024, with revenue growing 13% year-over-year to reach $5.3 billion during the quarter. The revenue growth was mainly on the back of strong performance in the Communication and Aerojet Rocketdyne segments, both contributing $1.35 billion and $581 million to the consolidated revenue, respectively. What sets L3Harris Technologies, Inc. (NYSE:LHX) ahead of its competition is its international mix and margin opportunities. Over the past year, the company has been able to improve its operating income by 19% to reach $400 million and its margins have improved by 50 bps, indicating operational efficiency and profitability of its business.
The Space and Airborne Systems segment improved its operational margins by 280 base points to 12.6%. Moreover, management has also initiated its LHX NeXt initiatives, which focus on increasing cost competitiveness and driving operational agility.
The strong market demand for L3Harris Technologies, Inc. (NYSE:LHX) products can be estimated by its ability to land new awards worth more than $5 billion over the quarter. These new awards resulted in a strong order backlog of $32 billion indicating robust growth for upcoming quarters.
Capitalizing on its strong business presence the company has increased its revenue guidance to $21.0 billion – $21.3 billion (the previous range was $20.8 billion to $21.3 billion). Moreover, L3Harris Technologies, Inc. (NYSE:LHX) is also cheap at current levels as it is trading at 17.5 times its forward earnings, while the market sits at a forward P/E ratio of 22. The company’s earnings are also expected to rise by 4% during the year to reach $3.48. 27 analysts have a consensus buy rating on the stock, with their median price target of $257 presenting an upside of 13.69% from the current level.
Diamond Hill Mid Cap Strategy made the following comment about L3Harris Technologies, Inc. (NYSE:LHX) in its Q3 2023 investor letter:
“L3Harris Technologies, Inc. (NYSE:LHX) is a defense contractor focused primarily on communications, surveillance and electronic warfare. We anticipate the US’s defense budget will be better than expected over the next few years as the Defense Department focuses on preparing for peer-level threats — an area in which LHX’s capabilities fit nicely. We believe there is room for improvement in recent execution — particularly at recently acquired Aerojet Rocketdyne — and we think LHX’s new management team is well-qualified to improve results. We accordingly capitalized on a recent share-price decline to initiate a position at what we consider a compelling valuation.”
Overall LHX ranks 7th on our list of the best undervalued aerospace stocks to buy. While we acknowledge the potential of LHX 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 LHX 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.