The aerospace and defense sector is set to soar, fueled by robust demand for commercial and defense aerospace products. Likewise, rising defense budgets in Europe, Australia, South Korea, and the U.S. are boosting demand for advanced defense capabilities, further strengthening this momentum.

With these strong tailwinds, investing in aerospace and defense stocks such as TransDigm Group Incorporated (TDG), RTX Corporation (RTX), and Lockheed Martin Corporation (LMT) presents a strategic opportunity.

This year, strategic joint ventures are favored for innovation and risk mitigation, with fewer regulatory hurdles than acquisitions. The aerospace sector is seeing a surge in M&A activity, driven by demand for satellite communications, defense capabilities, and LEO infrastructure. Meanwhile, intensifying competition is prompting smaller firms to merge while larger players focus on scaling and securing supply chain capabilities.

Furthermore, the U.S. Air Force’s FY 2025 budget request stands at $188.10 billion, reflecting a $3 billion increase from FY 2024. Meanwhile, the growing influence of the private sector on policy is expected to prioritize space as a strategic asset, driving further growth and innovation. As a result, the U.S. aerospace and defense market is projected to reach $656.93 billion by 2029, with a CAGR of 5.76%.

Therefore, let’s analyze the fundamentals of the three Air/Defense Services picks, beginning with the third choice.

Stock #3: TransDigm Group Incorporated (TDG)

TDG designs, produces, and supplies aircraft components in the U.S. and internationally. The company operates through Power & Control, Airframe, and Non-aviation segments.

TDG’s trailing-12-month Return on Total Capital of 12.32% is 70.5% higher than the industry average of 7.23%. Likewise, its trailing-12-month EBIT margin and EBITDA margin of 45.30% and 49.23% are 338.7% and 251% higher than the industry averages of 10.33% and 14.03%, respectively.

For the fiscal fourth quarter that ended on September 30, 2024, TDG’s net sales increased 18% year-over-year to $2.19 billion. Its gross profit rose 15.3% compared to the year-ago value, reaching $1.26 billion. Likewise, the company’s adjusted net income and adjusted EPS grew 23.9% and 22.4%, respectively, from the prior year’s quarter to $570 million and $9.83.

Street expects TDG’s EPS and revenue for the quarter ended December 31, 2024, to increase 7.3% and 12.9% year-over-year to $7.68 and $2.02 billion, respectively. TDG surpassed the consensus EPS and revenue estimates in each of the trailing four quarters. The stock has gained 24.4% over the past year to close the last trading session at $1,262.11.

TDG’s favorable outlook is reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

TDG has an A grade for Momentum and a B for Stability and Quality. It is ranked #24 out of 70 stocks in the Air/Defense Services industry. Beyond what we stated above, we have also rated TDG for Growth, Value, and Sentiment. Get all ratings of TDG here.

Stock #2: RTX Corporation (RTX)

RTX is an aerospace and defense company that provides systems and services for commercial, military, and government customers internationally. It operates through three segments: Collins Aerospace, Pratt & Whitney, and Raytheon.

On January 3, 2025, RTX announced a $946 million contract to provide Romania with more Patriot air and missile defense systems, including radars, control stations, and missiles. This is Romania’s third Patriot order, highlighting its dedication to strengthening collective security and stability in Europe.

On December 5, 2024, RTX secured a $590 million contract with the U.S. Navy to produce the Next Generation Jammer Mid-Band (NGJ-MB) system. Designed for EA-18G Growlers, this advanced electronic warfare system targets modern radar threats, boosting combat capabilities for the U.S. Navy and the Royal Australian Air Force.

In terms of the trailing-12-month levered FCF margin, RTX’s 10.21% is 50.9% higher than the 6.77% industry average. Likewise, its 2.99% trailing-12-month Capex / Sales is 5.8% higher than the 2.82% industry average. Its 15.90% trailing-12-month EBITDA margin is 13.4% higher than the 14.03% industry average.

RTX’s sales for the third quarter ending September 30, 2024, increased 6% year-over-year to $20.09 billion. Its adjusted net income attributable to common shareholders rose 6.9% year-over-year to $1.95 billion, while its EPS increased 16% year-over-year to $1.45. In addition, the company’s free cash flow was $1.97 billion.

Analysts expect RTX’s EPS and revenue for the quarter ended December 31, 2024, to increase 5.4% and 3.3% year-over-year to $1.36 and $20.57 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. RTX’s stock has gained 33.7% over the past year to close the last trading session at $115.11.

RTX’s bright prospects are reflected in its POWR Ratings. It has an overall rating of B, translating to a Buy in our proprietary system.

It is ranked #8 in the same industry. It has an A grade for Momentum and a B for Growth. In addition to the POWR Ratings grades I’ve just highlighted, you can see RTX’s ratings for Value, Stability, Sentiment, and Quality, here.

Stock #1: Lockheed Martin Corporation (LMT)

LMT is a security and aerospace company that engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide. The company operates through Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space segments.

On December 16, 2024, LMT launched the GPS III SV07 satellite into orbit, accelerating the Space Force’s GPS modernization efforts. The satellite, featuring advanced anti-jamming M-code technology, enhances secure navigation and positioning for military and global applications.

On the same date, LMT announced the launch of Astris AI, a subsidiary focused on providing secure, scalable AI solutions for defense and commercial sectors. Astris AI leverages LMT’s AI expertise to deliver high-assurance AI platforms and consulting services for regulated industries.

In terms of the trailing-12-month net income margin, LMT’s 9.36% is 44.2% higher than the 6.49% industry average. Likewise, its 21.08% trailing-12-month Return on Total Capital is 191.7% higher than the industry average of 7.23%. Also, LMT’s 1.27x trailing-12-month asset turnover ratio is 61.6% higher than the industry average of 0.79x.

In the fiscal third quarter that ended on September 29, 2024, LMT’s net sales increased 1.3% year-over-year to $17.10 billion. Its gross profit rose 3.4% from the prior-year value to $2.12 billion. Moreover, its operating profit and EPS were $2.14 billion and $6.80, up 4.8% and slightly, respectively, from the previous year’s quarter.

For the quarter ending March 31, 2024, NOC’s revenue is expected to increase 2.5% year-over-year to $17.63 billion. Its EPS for the same quarter is expected to rise 1.8% year-over-year to 6.44. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 3.6% to close the last trading session at $468.05.

LMT’s POWR Ratings reflect its strong fundamentals. It has an overall rating of B, translating to a Buy in our proprietary rating system.

It has an A grade for Momentum and a B for Value and Quality. It is ranked #3 in the Air/Defense Services industry. To see LMT’s Growth, Stability, and Sentiment rating, click here.

What To Do Next?

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RTX shares rose $0.25 (+0.21%) in after-hours trading Monday. Year-to-date, RTX has gained 1.75%, versus a -0.80% rise in the benchmark S&P 500 index during the same period.

About the Author: Abhishek Bhuyan

Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments. More...

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