Impressive global air passenger traffic forecasts offer promising growth opportunities for the Zacks Aerospace-Defense Equipment industry stocks. However, persistent supply-chain disruptions in commercial aerospace might reduce the demand for aircraft parts, affecting the industry’s profitability and cash flow. Nevertheless, strategic mergers and acquisitions are expected to enhance economies of scale for the industry players and diversify their product offerings, thereby offsetting the headwinds. Some key players from this industry that investors may add to their portfolio are Axon Enterprise AXON, Kratos Defense & Security Solutions KTOS and AAR Corp. AIR.
About the Industry
The Zacks Aerospace-Defense Equipment industry comprises firms that manufacture various 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. Some of these companies also offer integrated simulation and training services to the U.S. defense force. While most of the revenues are 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.
3 Trends Shaping the Future of the Aerospace-Defense Equipment Industry
New M&As Instill Hope: Rising competition has historically prompted industry majors to expand their product lines through valuable mergers and acquisitions (M&As). In December 2024, Teledyne Technologies completed the acquisition of Micropac Industries, which designs and manufactures microelectronic circuits, optoelectronic components, and sensor and display assemblies, primarily for military, aerospace and medical applications. In October 2024, HEICO Corporation’s Electronic Technologies Group acquired approximately 88% of Mid Continent Controls, Inc. ("MC2"). MC2 is a niche designer and manufacturer specializing in proprietary in-cabin power and entertainment components and subsystems for business jets, with its core products including power outlets, power distribution modules, cabin management systems, multimedia connectivity ports, seat controls and switch panels.
Looking ahead, in the first quarter of 2025, Teledyne expects to complete the acquisition of select aerospace and defense electronics businesses from Excelitas Technologies. Such consolidations should improve economies of scale for the industry as a whole, with the players having access to diversified business models. This, in turn, should bolster their revenue growth as well as market reach.
Impressive Air Traffic View Boosts Prospects: World air travel data has been on a steady growth trajectory over the past few months, driven by pent-up passenger demand. Per a report published by the International Air Transport Association (“IATA”) in December 2024, revenue passenger kilometers (RPKs) — the metric used to indicate air passenger demand — is projected to grow 8% in 2025. Consequently, airline industry revenues are expected to reach a historic high of $1.007 trillion this year, implying a 4.4% year-over-year improvement. Such projections bode well for aerospace-defense equipment industry stocks, especially those engaged in commercial aviation.
Supply-Chain Disruption Poses Risk: The persistent supply-chain issues continue to affect global trades and businesses. Airlines have been directly affected by unforeseen maintenance issues on some aircraft/engine types, as well as delays in the delivery of aircraft parts and aircraft, thereby limiting capacity expansion and fleet renewal. To this end, IATA announced in its December 2024 outlook that supply-chain vulnerabilities will continue to affect the profitability of the global airline industry in 2025. Notably, the IATA estimates 2024 aircraft deliveries to be 1,254, suggesting a 30% shortfall on what was predicted earlier for the year because of supply-chain issues. In 2025, deliveries are forecasted to be 1,802, which comes well below the earlier expectation of 2,293 with predictions for further downward revisions this year. Fewer jet deliveries imply lower demand for aircraft parts. This, in turn, may cause Original Equipment Manufacturers to scale down their production volume, resulting in lower earnings and cash flows for the aerospace and defense equipment industry in the near term.
Zacks Industry Rank Reflects Dim Outlook
The Zacks Aerospace-Defense Equipment industry is housed within the broader Zacks Aerospace sector. It currently carries a Zacks Industry Rank #152, which places it in the bottom 39% 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 gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
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 both the Zacks S&P 500 composite and its sector over the past year. The stocks in this industry have collectively surged 37.7% in a year, while the Aerospace sector has risen 9.9%. The Zacks S&P 500 composite has surged 24.8% in the same time frame.
One-Year Price Performance
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 7.72X compared with the S&P 500’s 5.60X and the sector’s 2.56X.
Over the past five years, the industry has traded as high as 8.06X, as low as 2.26X and at the median of 5.89X, as the charts show below.
EV-Sales Ratio TTM.jpg)
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3 Aerospace-Defense Equipment Stocks to Buy
AAR: Based in Wood Dale, IL, AAR provides various products and services like used serviceable engine and airframe parts and components, as well as airframe maintenance, component repair, and landing gear overhaul services, to the aviation and defense industries worldwide. On Jan. 7, 2025, the company announced its second-quarter fiscal 2025 results. Its net sales improved 26% year over year, while its adjusted operating margin expanded 110 basis points.
The Zacks Consensus Estimate for fiscal 2025 sales indicates a 19.5% improvement from the previous year’s registered number. The estimate for its fiscal 2025 earnings reflects a 13.2% improvement from the previous year’s registered number. AAR currently sports a Zacks Rank #1 (Strong Buy).
Price & Consensus: AIR
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Axon Enterprise: Based in Scottsdale, AZ, Axon Enterprise develops and manufactures weapons for the U.S. state and local governments, the U.S. federal government, international government customers and commercial enterprises. On Dec. 3, 2024, Axon revealed that Loomis US is equipping vehicle armored service technicians with Axon Body 4 cameras as part of its continued effort to improve safety and transparency. The deployment, spanning across the United States, includes more than 2,000 body-worn cameras and licenses to Axon's digital evidence management system, Axon Evidence. This reflects the solid demand that Axon’s body cameras enjoy in the security industry.
The Zacks Consensus Estimate for AXON’s 2025 sales indicates a 22.6% improvement from the previous year’s estimated number. The stock boasts a long-term earnings growth rate of 29.8%. It currently sports a Zacks Rank #2 (Buy).
Price & Consensus: AXON
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Kratos Defense & Security Solutions: Based in San Diego, CA, Kratos offers high performance, jet powered, unmanned aerial target drone systems and also specializes in space and satellite communications, cyber security/warfare, microwave electronics, missile defense, hypersonic systems, C5ISR, training and combat systems. On Jan. 13, 2025, KTOS announced that it has won a hypersonic system program award, with a potential value of approximately $100 million. Such contract wins add to the company’s backlog count and bolster its revenue generation prospects.
The Zacks Consensus Estimate for KTOS’ 2025 sales indicates a 12.2% improvement from the previous year’s estimated number. The estimate for its 2025 earnings implies a 27.9% improvement from last year’s estimated number. KTOS currently holds a Zacks Rank #2.
Price & Consensus: KTOS .jpg)
5 Stocks Set to Double
Each was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2024. While not all picks can be winners, previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
Axon Enterprise, Inc (AXON) : Free Stock Analysis Report
AAR Corp. (AIR) : Free Stock Analysis Report
Kratos Defense & Security Solutions, Inc. (KTOS) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
