Zacks Industry Outlook Highlights AeroVironment, Kratos Defense & Security Solutions and AerSale

For Immediate Release

Chicago, IL – October 21, 2022 – Today, Zacks Equity Research discusses AeroVironment AVAV, Kratos Defense & Security Solutions KTOS and AerSale ASLE.

Industry: Defense Equipment

Link: https://www.zacks.com/commentary/1994666/3-defense-equipment-stocks-to-buy-in-the-face-of-a-rising-us-dollar

U.S. domestic business travel volume is expected to gather further pace in the remainder of 2022, thereby boosting prospects of aerospace-defense equipment stocks. Moreover, frequent mergers and acquisitions tend to boost the revenue generation prospects of the industry players. However, COVID-led supply chain disruption might hurt earnings and cash flows for the industry. Also, a stronger U.S. dollar puts pressure on airlines, which, in turn, may hurt aerospace-defense equipment stocks, particularly those engaged in commercial aerospace.

Nevertheless, increasing revenue passenger kilometers are expected to boost investment in the industry. Some key players in this industry include AeroVironment, Kratos Defense & Security Solutions and AerSale.

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 the revenues is generated from the 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 the big mergers witnessed in the industry. In July 2022, Curtiss-Wright completed the acquisition of Safran Aerosystems Arresting Company (“SAA”) for $240 million.

Through the SAA acquisition, Curtiss-Wright aims to become a leading global supplier of fixed-wing aircraft recovery and arresting systems. Also, the acquisition is likely to fortify the company’s presence in the global defense market, aided by SAA’s global footprint. Such consolidations should improve economies of scale for the industry as a whole, with the players having access to diversified business models.

Recovering Air Traffic View Boosts Prospects: World air travel data, which dwindled at the onset of 2022, thanks to the sporadic outbreak of the Omicron variant, has regained its growth trajectory in the past few months. Per the latest global outlook published by the International Air Transport Association (IATA) in August, revenue passenger-kilometers (RPKs) increased 67% year over year in July 2022, continuing the recent trend.

Looking ahead, as stated by the U.S. Travel Association, domestic business travel volume is expected to reach 81% of pre-pandemic levels in 2022 and 96% in 2023. This makes us optimistic about the near-term growth prospects of aerospace-defense equipment industry stocks, especially those engaged in commercial aviation.

Unusual Strength of the Dollar Remains a Concern:The accelerated appreciation of the U.S. dollar in 2022 has been led by the Russia-Ukraine war. This war, in turn, has been a major catalyst behind the latest inflation surge. A stronger U.S. dollar puts pressure on airlines on top of high inflation and high jet fuel prices. This is because U.S. dollar-denominated costs rise for all businesses whose revenues are in another currency. Thus, an appreciated U.S. dollar value remains a risk for aerospace-defense equipment stocks, particularly the ones in commercial aerospace.

Supply Chain Disruption Poses Risk: The COVID-19 pandemic has led to an unprecedented crisis in the aerospace and defense supply chain. Original Equipment Manufacturers (OEMs) need 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 #184, which places it in the bottom 27% 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.
The industry’s position in the bottom 50% of the Zacks-ranked industries is due to a negative earnings outlook for the constituent companies in aggregate.

Looking at the aggregate earnings estimate revisions, it appears that analysts have lost confidence in this group’s earnings growth potential over the past few months. Evidently, the industry’s earnings estimate for the current fiscal year has gone down 13.2% to $3.96 since April 2022.

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 but underperformed its sector over the past year. The stocks in this industry have collectively declined 9.5%, while the Aerospace sector declined 14.5%. The Zacks S&P 500 composite has dropped 19.2% 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 2.31X compared with the S&P 500’s 3.17X and the sector’s 2.16X.

Over the past five years, the industry has traded as high as 2.71X, as low as 2.21X, and at the median of 2.47X.

3 Aerospace-Defense Equipment Stocks to Buy

AeroVironment: Based in Simi Valley, CA, AeroVironment designs, develops, produces and operates a portfolio of products and services for government agencies, businesses and consumers. It operates through two segments: Unmanned aircraft systems and Efficient Energy systems.  In October 2022, the company held its investor event, wherein, the company revealed that it plans to significantly increase spending for classified U.S. DoD programs.

The Zacks Consensus Estimate for AeroVironment’s fiscal 2023 earnings indicates a 24.8% improvement from fiscal 2022’s estimated figure. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AerSale: Based in Coral Gables, FL, provides integrated, diversified aviation aftermarket products and services for aircraft owners and operators to realize savings in the operation, maintenance and monetization of their aircraft, engines and components. In August 2022, the company reported its second-quarter 2022 results. Its revenues for the second quarter of 2022 were $139.6 million compared with $91.9 million in the second quarter of 2021.

The Zacks Consensus Estimate for ASLE’s 2022 sales implies an improvement of 42.8% from 2021’s reported figure. The stock has a four-quarter average earnings surprise of 156.22%. The company currently holds a Zacks Rank #2 (Buy).

Kratos Defense & Security: San Diego, CA.-based Kratos Defense offers high-performance, jet-powered, unmanned aerial target drone systems which are designed to replicate state-of-the-art adversarial fighter aircraft, missiles and other threats. In September 2022, the company announced a successful flight from its family of Collaborative Combat Aircraft, which includes more than four different aircraft types, with each having been flying for several years, proving, validating, and demonstrating key mission capabilities,

The Zacks Consensus Estimate for KTOS’ 2022 sales suggests an annual improvement of 11.6%. The stock has a four-quarter average earnings surprise of 121.03%. The company currently has a Zacks Rank #2.

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AeroVironment, Inc. (AVAV) : Free Stock Analysis Report
 
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