In times of war, investors’ thoughts naturally may turn to defense stocks.

Continuing wars in Ukraine and Israel and Gaza, along with various simmering geopolitical hotspots around the world, could mean increased revenues for U.S. defense contractors, enhancing the allure of stocks in the aerospace and defense category.

Though aerospace and defense funds understandably haven’t done well in this year’s faltering market, some individual stocks have posted substantial gains. And now that the overall market has started moving upward in recent weeks, this could be an advantageous time for investors to consider the category.

Government sales account for varying amounts of revenues received by aerospace/defense companies — from 100% down to 30% or less in some cases.

Diversified revenue creates a ‘sweet spot’

As the label aerospace and defense implies, many such companies have civilian business from jetliner manufacturers and airlines, so the current boom in commercial aviation is a positive for them. This diversification currently puts them in a sweet spot.  

Though U.S. defense spending on contractors has been pared back a bit over last couple years, some aerospace and defense firms continue to benefit from total contract spending that increased markedly in 2017-2020, from $373.5 billion to $448.9 billion, rising with the total defense budget.

Lesser-known companies have key market positions

Publicly traded companies in this category with relatively low downside risk (based on various fundamental metrics) and good growth projections include some familiar names of large companies, including General DynamicsLockheed Martin and Northrup Grumman.

Yet, standing out from such behemoths are some lesser known and/or smaller companies whose key market positions and robust growth projections may signal greater potential for investors.

Among them are these six:

TransDigm Group Inc. (TDG)

  • Projected average annual earnings growth over five years, according to FactSet: 26%
  • Market cap: $48 billion (as of mid-November)

TransDigm designs and manufactures original aircraft parts for manufacturers and aftermarket replacement parts for operators of commercial and military aircraft. Most of its revenue is from civilian aviation sources. The company is benefiting from the integration of global economies, which is spurring jetliner fleet additions, and from pricing power as the sole supplier of some items. Though its trailing 12-month price/earnings ratio is high, at 47, this multiple has been pushed up by stock price growth of about 15% over the past six months, as of mid-November.

Parsons Corp. (PSN)

  • Projected five-year annual earnings growth: 13%.
  • Market cap: $6.5 billion.

This global technology company gets most of its revenue from federal agencies, both defense and civilian. Parsons Corp. clients include the U.S. Department of Defense, the Missile Defense Agency, the State Department, Department of Homeland Security, the Department of Energy and the Federal Aviation Administration. Products and services include items to counter unmanned air systems, and gear for national security, bio-surveillance, space launches, border security, rail design/control and infrastructure engineering. The stock prices has increased about 36% over the past six months, bringing the trailing P/E up to 48.

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