Investors are now eyeing the aerospace and defense industry with
renewed interest after the U.S. Senate reached an agreement to end
the 16-day government shutdown and temporarily raised the federal
Keeping in mind technological progress, acquisition benefits,
and cost-cutting efforts of individual companies, we have an
overall bullish outlook for the sector. However, sequestration,
which came into effect from Mar 1, still remains an overhang both
in the civil and military businesses.
The defense companies have however figured out the strategies to
stimulate growth and counter the ill effects of sequestration and
budget austerities. In fact, defense players seem to be doing well
despite the cuts in defense budgets and big-ticket programs.
Given the positive sentiment, it might be a good idea to bet on a
handful of aerospace and defense stocks that are poised to beat
earnings estimates this quarter.
How to Make a Choice?
Picking the right stock for your portfolio could appear to be a
daunting task amid a wide range of companies in the aerospace and
defense space. One way to confine the list of choices during this
earnings season is by looking at stocks that have a solid Zacks
Rank accompanied by a favorable Zacks
Earnings ESP is our proprietary methodology for determining which
stocks have the best chance to surprise with their next earnings
announcement. It shows the percentage difference between the Most
Accurate Estimate and the Consensus.
The combination of a favorable Zacks Rank - Zacks Rank #1
(Strong Buy), #2 (Buy) or #3 (Hold) - and a positive Earnings ESP
is usually an indication of an earnings beat. Our research shows
that for stocks with this combination, the chance of positive
earnings surprise is as high as 70%.
Here are three aerospace and defense stocks that are scheduled to
release earnings next week and match these criteria:
Lockheed Martin Corp.
Lockheed Martin is the world's largest stand-alone defense
contractor, whose 82% of sales come from the U.S. government.
Supported by multiple strengths like growth in earnings per share
and notable return on equity, the company presently carries a Zacks
Rank #2 (Buy) and has an Earning ESP of +2.21%. Lockheed Martin is
set to report its third quarter results on Oct 22, before the
Loaded with contracts, Lockheed Martin is building three models of
the very expensive and controversial F-35 for the U.S. military and
eight international partner countries including Britain, Australia,
Canada, Norway, Turkey, Italy, Denmark and the Netherlands. Israel
and Japan have also ordered the fighter jet. Lockheed Martin's F-35
program accounts for approximately 15% of the company's total
revenues. The sales contribution from the F-35 is expected to go up
in the coming years.
Northrop Grumman Corp.
Falls Church, Va.-based Northrop Grumman supplies a broad array of
products and services to the Department of Defense (DoD), including
electronic systems, information technology, aircraft, space
technology, and systems integration services.
A steady flow of contracts, which also include substantial
international orders, a funded backlog of $23.2 billion, the
introduction of new products, and the tendency of returning wealth
to its shareholders make this Zacks Rank #2 (Buy) stock attractive.
Northrop also has an Earnings ESP +2.21%. The company is expected
to report its third quarter 2013 results before the market opens on
General Dynamics Corp.
Based in Falls Church, Virginia, General Dynamics Corp. engages in
mission-critical information systems and technologies; land and
expeditionary combat vehicles, armaments and munitions;
shipbuilding and marine systems; and business aviation. Jet sales
at the Gulfstream business are continuing to see traction even in
the slowing defense sales scenario.
Despite the budget austerity, we believe General Dynamics will
remain well-positioned backed by its effective execution skills and
diverse product offerings. The company currently has a Zacks Rank
#3 along with an Earning ESP of +1.80%. The company is expected to
report its third quarter 2013 results before the opening bell on
In spite of the unstable political scenario and budget cuts, the
defense pros, much to their relief, have been awarded a steady
stream of contracts from the Pentagon. These companies are also in
the lookout for more international contracts, or FMS, to keep their
top line intact.
So, the question no longer is whether or not to choose defense
stocks. But the critical question is to choose the right defense
stocks before they release earnings.
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