The United States’ fraught relationships with China and Russia have driven its rising investments in its defense sector. President Biden recently requested $753 billion for national security funding for his fiscal 2022 budget (which begins October 1, 2021). The amount is 1.6% higher than the amount spent in the previous year. Of the requested amount, $715 billion is earmarked for the Department of Defense.
With China perceived to be the biggest threat given the size of the nation’s economy and the country’s air drills around neighboring countries, Biden aims to boost the defense budget by 16% to $769 billion. Furthermore, the United States has also played a major role in defusing the Israel-Palestine conflict, through cash and defense equipment funding support.
Thus, the aerospace and defense industry is likely to grow substantially in the coming months. Given this backdrop, the following lesser-known companies with direct ties with the Department of Defense and the U.S. Army and Navy should grow significantly: L3Harris Technologies, Inc. (LHX), Textron Inc. (TXT) and Huntington Ingalls Industries, Inc. (HII). So, we think these stocks could be solid additions to one’s portfolio.
L3Harris Technologies, Inc. (LHX)
LHX is a technology-based company that specializes in aerospace and defense equipment. It operates through four segments: Integrated Mission Systems, Space and Airborne Systems, Communication System and Aviation Systems. With a global supply chain, the company sells its equipment to federal governments and to commercial customers.
On May 6, LHX collaborated with Air Tractor to build the AT-802U Sky Warden™ aircraft. This affordable aircraft is designed for airborne intelligence, surveillance and reconnaissance (ISR) and other missions in extreme combat situations. With LHX’s 10-year-plus experience in supporting tight missions, and Air Tractor’s expertise in manufacturing aircraft, this collaboration should facilitate LHX’s growth.
In April, LHX teamed up with American Rheinmetall Vehicles to develop the U.S. Army’s new Optionally Manned Fighting Vehicle (OMFV) that will replace the Bradley Infantry Fighting Vehicle. The new vehicle is expected to be a big thing in the ground defense vehicle market, thereby boosting LHX’s revenues.
LHX’s non-GAAP organic revenues increased 1.8% year-over-year to $4.57 billion in its fiscal first quarter, ended April 2. Its income from continuing operations before income taxes grew 138.5% from the year-ago value to $527 million. LHX’s net income was $467 million, indicating a 140.2% rise year-over-year. The company’s non-GAAP EPS increased 14% year-over-year to $3.18.
The Street expects LHX’s revenues to rise 4.1% year-over-year to $4.63 billion in the current quarter, ending June 2021. A $3.17 consensus EPS estimate for the current quarter indicates a 12% improvement year-over-year.
Shares of LHX have gained 10.7% over the past year, and 14.9% year-to-date.
It’s no surprise that LHX has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
LHX has a B grade for Stability and Quality. Among the 65 stocks in the Air/Defense Services industry, LHX is ranked #12. To see LHX’s additional POWR Ratings for Growth, Momentum, Value and Sentiment, click here.
Textron Inc. (TXT)
TXT manufactures aircraft and commercial vehicles. The company operates through five segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. TXT is a manufacturer of business jets and aircrafts. It also offers a wide range of warfare kits and surveillance systems.
On June 1, E-Z-GO, a Textron Specialized Vehicles business, launched its new golf vehicle, the E-Z-GO Liberty. The new vehicle is powered by a high-performance, zero-maintenance Samsung SDI lithium-ion battery system to provide a premium driving experience. E-Z-GO is expected to be highly popular among golf enthusiasts, owing to its premium design and features.
On May 19, Textron Aviation sold a Citation jet to DALaviation Switzerland. This marks the third jet TXT has sold to DALaviation. TXT has been strengthening its operations overseas through such sales, making it a prominent player in this space.
Also in May, Textron owned Premiair Aviation in Australia announced an approval from the Civil Aviation Safety Authority (CASA) to extend its service and support to all in-country Cessna, Beechcraft and Hawker turbine aircraft models at its three locations. This should enhance customer satisfaction and convenience. With this service added to its MRO capabilities, the company’s market reach should be expanded prominently.
TXT’s total revenues increased 3.7% year-over-year to $2.88 billion in the first quarter, ended April 3. Its net income grew 242% from its year-ago value to $171 million over the period. This can be attributed to a 63.4% and 100% rise in its Manufacturing and Finance segment profits, respectively. The company’s EPS increased 240.9% year-over-year to $0.75.
Analysts expect TXT’s revenues to rise 18.2% year-over-year to $2.92 billion in the current quarter, ending June 30, 2021. A $0.65 consensus EPS estimate for the current quarter indicates a 400% improvement year-over-year.
Shares of TXT have gained 118.9% over the past year, and 42.9% year-to-date.
TXT has an overall B rating, which equates to Buy in our proprietary ratings system. The stock has a B grade for Growth and Value. It is ranked #4 in the Air/Defense Services industry. To see additional TXT Ratings for Sentiment, Stability, Momentum and Quality, click here.
Huntington Ingalls Industries, Inc. (HII)
HII is involved in in military ship building and after-sales operations. It is the largest ship building company in the United States. It operates through three segments: Ingalls Shipbuilding (Ingalls), Newport News Shipbuilding (Newport News) and Technical Solutions.
On May 28, the Naval Sea Systems Command awarded HII a $302.64 million hybrid contract for planning yard support for transport dock ships, assault ships, dock landing ships and command ships. The contract also specifies several options, which if exercised, increases the contract value to $724.27 million. This should boost HII’s revenues significantly in the coming months.
On May 25, HII announced that two of its REMUS 300 unmanned underwater vehicles (UUVs) were ordered by the U.S. Navy. HII has been a government contractor for national security equipment for many years. This order demonstrates HII’s strong relationship with the U.S. Navy, making it one of the most highly regarded companies in this sector.
HII’s product sales increased 6% year-over-year to $1.72 billion in the fiscal first quarter, ended 31 March. Its non-GAAP segment operating profit grew 22.4% from the year-ago value to $191 million. Its cash and cash equivalents balance rose 1,353.6% from the prior year quarter to $407 million over this period. And its adjusted net earnings came in at $143 million, up 44.4% from the same period last year.
A $2.18 billion consensus revenue estimate for the fiscal second quarter (ending June 2021) indicates a 2% increase year-over-year. The Street expects the company’s EPS to rise 97.7% from the prior-year quarter to $2.57 in the current quarter. The company has an impressive earnings surprise history also; it beat consensus EPS estimates in three of the trailing four quarters.
HII gained 32.6% over the past six months to close yesterday’s trading session at $218.09. The stock has gained 27.9% year-to-date.
HII has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. HII has an A grade for Value and a grade of B for Quality. It is ranked #11 in the same industry.
Beyond what we’ve stated above, we have also rated HII for Momentum, Growth, Sentiment and Stability. Click here to view all HII Ratings.
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LHX shares were trading at $218.72 per share on Wednesday afternoon, up $1.53 (+0.70%). Year-to-date, LHX has gained 16.88%, versus a 12.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...
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