Zacks Industry Outlook Highlights: TransDigm Group, Triumph Group, Kaman Corp, Raytheon and Teledyne

For Immediate Release

Chicago, IL – October 22, 2021 – Today, Zacks Equity Research discusses Defense Equipment, including TransDigm Group Incorporated TDG, Triumph Group, Inc. TGI, Kaman Corporation KAMN, Raytheon Technologies Corporation RTX and Teledyne Technologies Incorporated TDY.

Link:https://www.zacks.com/commentary/1813899/3-defense-equipment-stocks-to-buy-amid-supply-chain-disruption

Frequent mergers and acquisitions tend to boost revenue generation prospects along with production efficiency of stocks in the Aerospace-Defense Equipment industry. Moreover, the recent recovery observed in the global commercial aerospace has been boosting hopes of these industry players.

The takeover of Kabul by Taliban, following violent confrontations across Afghanistan, is expected to boost investment in the industry. However, COVID-led supply chain disruption might result in lower earnings and cash flows for the industry. A handful of important players in this industry include TransDigm Group, Triumph Group and Kaman Corp.

About the Industry

The Zacks Aerospace-Defense Equipment industry comprises firms that manufacture a wide variety of vital components for the aerospace-defense space, ranging from aerostructures, space shuttles, propulsion systems, aircraft engines, defense electronics, missile and radar systems to flight test equipment, structural adhesives, instrumentation and control systems, communication products and many more.

A few of these companies also offer integrated simulation and training services to the U.S. defense force. While the majority of revenues is generated from production of the aforementioned accompaniments, the industry players also generate revenues by providing notable aftermarket support and services like maintenance, repair and overhaul activities to aerospace and defense players.

4 Trends Shaping the Future of the Aerospace-Defense Equipment Industry

New M&As Instill Hopes: Rising competition has historically prompted industry majors to expand their product lines through small and medium-sized mergers and acquisitions (M&As) besides some big mergers witnessed in the industry. In September, Raytheon signed an agreement to acquire FlightAware, which currently operates the world's largest flight-tracking and data platform. This will strengthen Raytheon’s footprint in the flight data monitoring market.

In May, Teledyne completed the acquisition of FLIR Systems for $8 billion thereby expanding its imaging sensor portfolio in terms of volumes. Such consolidations should improve economies of scale for the industry as a whole.

Improved Traffic Boosts Prospects: The year 2020 can be deemed as the worst year in the history of global air travel, with revenue passenger kilometers plunging 65.9% from 2019. However, optimism surrounding the arrival and initial distribution of vaccines has instilled confidence among travelers over the past few months. As a result, a gradual recovery has been observed in global air traffic.

Looking ahead, per a report released by the International Air Transport Association (IATA) in early October 2021, global revenue passenger kilometers are estimated to improve 18% in 2021 from 2020, reaching 40% of the pre-crisis levels. This surely indicates notable growth prospects for stocks in the aerospace-defense equipment industry.

Socio-Political Uncertainty to Aid: Widespread geo-political as well as socio-economic tensions have been a growth driver for the aerospace and defense equipment industry for decades. In recent times, escalating international terrorist attacks along with civil wars like the ones in the Middle East have been boosting the prospects of this space.

In particular, U.S. defense contractors’ prospects in this region were boosted by the conflict that took place between Israel and Palestine in May that involved a violent exchange of rockets and missiles in Gaza and parts of Israel. The takeover of Kabul by the Taliban this August, following a violent clash of guns, caused fresh tensions across Afghanistan. Such geopolitical tensions are expected to be beneficial for the aerospace-defense equipment industry.

Supply Chain Disruption Poses Risk: COVID-19 pandemic has led to an unprecedented crisis in the aerospace and defense (A&D) supply chain. Original Equipment Manufacturers (OEMs) needed to dramatically scale back their capacity to reflect the new realities of the commercial air travel market. Such OEM rate reductions have been affecting the extended commercial aerospace manufacturing supply chain, which might result in lower earnings and cash flows for the aerospace and defense equipment industry in the near term.

Zacks Industry Rank Reflects Bleak Outlook

The Zacks Aerospace-Defense Equipment industry is housed within the broader Zacks Aerospace sector. It currently carries a Zacks Industry Rank #190, which places it in the bottom 24% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few aerospace-defense equipment stocks that you may want to add to your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Beats S&P 500 & Sector

The Aerospace-Defense Equipment industry has outperformed the Zacks S&P 500 composite as well as its own sector over the past year. The stocks in this industry have collectively gained 36% compared with the Aerospace sector’s growth of 5.7%. The Zacks S&P 500 composite has surged 32.5% in the same timeframe.

Industry's Current Valuation

On the basis of trailing 12-month EV/Sales, which is used for valuing capital intensive stocks like aerospace-defense equipment, the industry is currently trading at 2.53X compared with the S&P 500’s 4.77X and the sector’s 2.12X.

Over the past five years, the industry has traded as high as 4.63X, as low as 1.30X, and at the median of 2.40X.

3 Aerospace-Defense Equipment Stocks to Buy

Triumph Group: Based in Berwyn, PA, Triumph Group is capable of producing a wide range of aircraft parts including hydraulic, mechanical and electromechanical control systems, aircraft and engine accessories, structural components, auxiliary power units and avionics and aircraft instruments. Buoyed by gradual recovery in commercial aerospace over the past few months, the solid orders observed for Airbus A320 and Boeing 737 Max jets in recent times are in turn expected to boost Triumph Group’s revenue prospects.

The Zacks Consensus Estimate for fiscal 2022 earnings indicates a massive 1,833% improvement year over year while that for fiscal 2023 projects an increase of 104.2%. The company currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Transdigm Group: Based in Cleveland, OH, Transdigm Group’s diversified portfolio of highly engineered proprietary aerospace components enjoy solid demand in the aircraft market. In June 2021, the company completed the divestiture of its ScioTeq and TREALITY Simulation Visual Systems businesses for approximately $200 million. Sale proceeds from such a transaction should boost this stock’s cash reserve.

The Zacks Consensus Estimate for fiscal 2022 earnings implies an improvement of 47.3% year over year. Its long-term earnings growth estimate is pegged at 13.6%. The company currently holds a Zacks Rank #2.

Kaman Corp.: Bloomfield, CT-based Kaman produces and markets proprietary aircraft bearings and components; super precision, miniature ball bearings, proprietary spring energized seals, springs and contacts; complex metallic and composite aerostructures for commercial, military and general aviation fixed and rotary wing aircraft; and safe and arming solutions for missile and bomb systems for the U.S. and allied militaries.

In September 2021, the company unveiled the KARGO UAV, the newest addition to its family of purpose-built, autonomous unmanned systems designed to be the new standard for expeditionary logistics. Such innovations are surely going to expand the company’s footprint in the Aerospace sector.

The Zacks Consensus Estimate for 2022 earnings suggests an annual improvement of 6.5%, while that for 2022 sales indicates an increase of 5.2%. The company currently has a Zacks Rank #2.

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Transdigm Group Incorporated (TDG) : Free Stock Analysis Report
 
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Raytheon Technologies Corporation (RTX) : Free Stock Analysis Report
 
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