Five Aerospace and Defense Investments to Purchase for Income
By: Paul Dykewicz,
Five aerospace and defense investments to purchase for income offer ways to support companies that are helping to counter Russia’s invasion of Ukraine by delivering coveted military capabilities.
The five aerospace and defense investments to purchase for income have the potential to trade at a premium to the market, according to a recent report from BofA Global Research. Defense companies historically have been immune to inflation, slowing economic growth and rising interest rates, while performing better in election years like this one, BofA added.
“Politicians would be unlikely to run on a platform for 2022 mid-term elections not supporting national security in the current environment,” wrote Ron Epstein, BofA’s senior aerospace and defense analyst.
For defense stocks, some investors and even certain sell-side analysts may not understand money flows from Congress to the U.S. Treasury and then to the contractors over time, so investors who expect a quick boost in defense company earnings likely will end up disappointed, Epstein opined. However, weakness in defense stocks can turn into a buying opportunity.
Five Aerospace and Defense Investments to Purchase for Income Include an ETF
Investors who like to gain exposure to multiple aerospace and defense stocks simultaneously can purchase a fund, said Bob Carlson, a pension fund chairman who also heads the Retirement Watch investment newsletter. One exchange-traded fund (ETF) that Carlson recommended to me is SPDR Aerospace and Defense (XAR), offering a 0.5% dividend yield.
Bob Carlson, who leads Retirement Watch, meets with Paul Dykewicz.
The ETF owns 34 stocks and has 36% of the fund in its 10 largest positions. Those positions include Boeing (NYSE: BA), Virgin Galactic (NYSE: SPCE) and Huntington Ingalls (NYSE: HII).
The fund seeks to track the S&P Aerospace and Defense using a sampling strategy. The index is broader than just defense stocks, so it gives exposure to aerospace for those who want it.
Investors who like to buy after an asset has fallen in value and may be on the rebound might take a shine to XAR. The ETF has rose 0.60% in the past week, after falling 7.23% in the last month, 15.27% for the past three months, 11.78% for the year to date and 21.39% for the last 12 months.
Chart courtesy of www.stockinvestor.com
One of Five Aerospace and Defense Investments to Purchase for Income Is a Hypersonic Stock
Spirit AeroSystems (NYSE: SPR), headquartered in Wichita, Kansas, is one of the world’s biggest manufacturers of aerostructures for commercial airplanes, defense platforms and business/regional jets. A provider of aluminum and advanced composite manufacturing solutions, the company’s core products include fuselages, integrated wings and wing components, pylons, and nacelles.
Aside from also supporting aftermarket work for commercial and business/regional jets, the company has a key role in the defense industry’s research and technology to address the most difficult technical challenges in the pursuit of hypersonic flight. The exceptional speed of such flight is above Mach 5, or five times the speed of sound. Mach 6 is six times the speed of sound, or 820 mph, equaling 2 km per second, or 7,200 km per hour.
Russia is ahead of the United States in developing hypersonic weapons and its defense officials have spoken about having the technology ready to use against Ukraine in just months. China also is seeking to lead in hypersonic technology, leaving the United States scrambling to catch up.
Spirit AeroSystems’ officials said America’s top technical priority right now is a low-risk and holistic approach to deploy operational hypersonic weapons at scale. A merger between Spirit AeroSystems and Fiber Materials, Inc. (FMI) occurred on Jan. 10, when Spirit closed its purchase. FMI’s products currently are on the Trident D5, Standard Missile, PAC 3, THAAD and NASA programs such as Stardust, Mars Curiosity, Orion and Mars 2020.
Gap May Close With One of the Five Aerospace and Defense Investments to Purchase
The combined company’s capabilities provide materials, design and production to provide thermal protection systems, a key enabling technology for hypersonic flight. FMI, based in Biddeford, Maine, is known in the industry for supplying high-temperature materials, backed by technical support and data for material characterization and predictability, while Spirit AeroSystems adds modeling and simulations to the process, along with its record of commercializing critical flight structures.
New capability provided by Spirit AeroSystems is aimed at helping to position America’s hypersonic programs to meet government demands and timelines. With more than nine decades of experience, the company offers supply chain management, as well as an understanding of the costs and other requirements, its officials said.
With a competitive commercial approach, Spirit AeroSystems is seeking to usher in a new and modern approach to the production of thermal protection, its officials said.
Chart courtesy of www.stockcharts.com
FMI has approximately 230 employees at two facilities. The company’s main operations focus on multi-directionally reinforced composites that enable high-temperature applications such as: thermal protection systems, re-entry vehicle nose tips, as well as rocket nozzles.
BWX Breaks Into Five Aerospace and Defense Investments to Purchase for Income
BWX Technologies, Inc. (NYSE: BWXT), is a Lynchburg, Virginia-based supplier of nuclear components and fuel for the U.S. government. The company also provides technical, management and site services to support governments in the operation of complex facilities and environmental restoration activities.
Chart courtesy of www.stockcharts.com
BofA recommends BWXT and put a $65 price objective on the stock. The valuation implies a 1.1x relative multiple on the defense primes’ 14x weighted average multiple, in line with historical average, according to BofA. The premium is supported by the company’s exposure to the U.S. Navy, its monopoly on nuclear-powered ships and its diversification efforts, the investment firm wrote in a note.
Risks to reaching that price target are a possible loss of U.S. government contracts, changes in contracting terms that could pressure margins and program procurement changes lead to market share loss. In addition, the U.S. government is BWXT’s largest customer and accounts for about 90% of the company’s revenues.
The stock may beat those BofA estimates by improving upon expected operating performance and margins, or benefit from increased demand for nuclear aftermarket for power plants and higher-than-expected share in missile tubes for the Virginia-class submarines and Ohio-class submarines, according to BofA.
Garmin Gains Slot Among Five Aerospace and Defense Investments to Purchase for Income
Garmin (NASDAQ: GRMN), of Olathe, Kansas, provides smart aviation solutions for local, state and federal government agencies, as well as defense organizations. The company offers commercial off-the-shelf (COTS) solutions or others specialized to a mission, using knowledge and experience to enhance an aircraft’s capabilities.
Garmin helps pilots see more, know more and fly smarter with proven technologies, its officials said. The company provides an array of technology to enhance avionics for defense organizations, as well as defense contractors, by offering integrated flight decks, navigation and communication systems, flight displays, weather radar and portable Global Positioning System (GPS) capabilities.
Bryan Perry, a high-income aficionado who is a veteran of Wall Street firms and the editor of the Cash Machine investment newsletter, told me he likes the stock’s potential.
Paul Dykewicz interviews Wall Street veteran Bryan Perry, who heads the Cash Machine newsletter.
Garmin May Outperform Market as One of Five Aerospace and Defense Investments to Purchase for Income
BoA put a $137 price objective on the stock, using a relative multiple that is consistent with the average relative multiple over the last 20 years to reflect GRMN’s competitive positioning.
Topping the price target could occur if faster-than-expected growth flows from new products like smart wearables and the development of an innovative, category-making new product. Increased demand for wearables also could enhance performance beyond estimates, BofA wrote.
Risks to reaching the price target of BofA are market saturation in the medium term, after some of the stock’s end markets benefitted from strong tailwinds in recent quarters due to the pandemic. Industry-wide constraints of certain electrical components further could hurt results, along with foreign exchange risk and freight headwinds hurting margins.
Chart courtesy of www.stockcharts.com
Leidos Leaps into Five Aerospace and Defense Investments to Purchase for Income
Leidos Holdings (NYSE: LDOS), a Reason, Virginia-based science and technology company that caters to the civil, defense, aviation, health and intelligence industries, formerly was known as Science Applications International Corporation (SAIC). Leidos merged with Lockheed Martin’s (NYSE: LMT) information technology (IT) sector, Information Systems & Global Solutions, in August 2016 to form the defense industry’s largest IT services provider.
The merger became one of the largest transactions in the consolidation of the defense sector, positioning Leidos to work extensively with the U.S. Department of Defense, the U.S. Department of Homeland Security and the U.S. intelligence community, including the National Security Agency (NSA).
BofA put a $125 price objective on the stock. The valuation is in line with defense prime contractors, as strong U.S. National Security demand for innovative technologies and solutions and solid free cash flow generation is offset by a lumpy award environment, supply chain pressures in the near term, pressure on pricing and mounting concerns about labor inflation, BofA added.
Risks to meeting the price target, according to BofA, include possible cuts to the U.S. government budget, increased competition from non-traditional players and problems integrating potential mergers, hiring the right people, containing costs, executing on fixed price contracts and uncertainty about future contract awards.
The outlook could be topped with a better-than-anticipated federal budget allocated to innovative technologies and modernization, inexpensive and well-integrated mergers, unexpected capital return to shareholders through share buybacks or dividends, market share gains and better-than-expected margin gains.
Chart courtesy of www.stockcharts.com
Soaring Car Sales In China Show Strengthened Supply Chains as COVID-19 Lockdowns Wane
Relaxed COVID-19 lockdowns in China helped car sales there jump nearly 23% in June, compared to a year ago, as production recovered in the country to meet pent-up demand. Government cash incentives also spurred demand in the world’s largest automobile market as June 2022 passenger car sales soared to 1.94 million, up from 1.35 million in May, according to the China Passenger Car Association.
Also during the past year, car production in China grew 46% to 2.2 million vehicles, showing that the industry has mostly recovered its capacity following a slowdown as China enforced lockdowns to thwart a Covid-19 outbreak that affected its automotive manufacturing center near Shanghai. China is trying to curb its COVID-19 restrictions, and it could allow goods produced there to begin flowing normally again in the weeks ahead.
China’s lockdowns have affected an estimated 373 million people, including roughly 40% of its gross domestic product (GDP). Disrupted supply chains have hit products such as rice, oil, natural gas and automobiles.
Shanghai, home to the world’s largest port and 25 million residents, had strained to unload cargo due to strict COVID lockdowns. Some Shanghai residents posted videos online about needing food, despite government officials trying to block such dissent.
U.S. COVID Deaths Climb Past 1.020-Million Mark
U.S. COVID-19 deaths climbed to 1,020,802 as of July 8, according to Johns Hopkins University. Cases in the United States, as of that date, hit 88,545,813. America retains the dubious distinction as the country with the highest numbers of COVID-19 deaths and cases.
COVID-19 deaths worldwide reached 6,349,296 on July 8, up about 7,000 in the past few days, according to Johns Hopkins. Cases across the globe have jumped more than 3 million to 554,309,496.
Roughly 78.4% of the U.S. population, or 260,327,743, have received at least one dose of a COVID-19 vaccine, as of July 7, the CDC reported. Fully vaccinated people total 222,455,652, or 67.0%, of America’s population, according to the CDC. The United States also has given at least one COVID-19 booster vaccine to 106.6 million people.
The five aerospace and defense investments to purchase for income are intended to profit from rising inflation, increased grain prices and other economic factors. Despite the market’s volatility, the highest inflation in 41 years, the Fed’s plan for further interest rate hikes this month and increasing federal deficits, investors still may find the selected aerospace and defense stocks and funds worth buying.