We recently compiled a list of the 10 Best Aerospace and Defense Stocks to Buy Now. In this article, we are going to take a look at where Northrop Grumman Corporation (NYSE:NOC) stands against the other aerospace and defense stocks.
The world has been rocked with conflict over the last few years. The war between Russia and Ukraine has gone beyond 860 days, with no immediate end in sight. Azerbaijan and Armenia continue to engage in a regular exchange of fire after the latter lost control of the Nagorno-Karabakh region to the Azeris in 2020. The Middle East is up in flames, with defense experts describing the ongoing Israel-Hamas conflict as the worst crisis in the region since the Arab-Israeli War in 1973.
While the human impacts of war are undeniably tragic, it is also a time when defense companies make money and lure investors into loading up on their stocks. According to a report on CNN earlier this year, defense companies in the United States and Europe have thrived since Russia invaded Ukraine in February 2022. German automotive and arms manufacturer Rheinmetall’s share price had surged by a staggering 315% in two years following the start of the conflict, while BAE Systems posted a 105% gain. Northrop Grumman and Lockheed Martin also witnessed an increase in their share prices by 18% and 10%, respectively.
When the war broke out, industry analysts expected the aerospace sector to be affected by western sanctions placed on Russia. According to KPMG, the country is the source of 30% of the titanium used by Boeing and other large engine producers that power fighter jets and commercial aviation. Titanium is a key material that goes into the development of jet fan blades and landing gears. However, the supply of titanium from Russia to these companies has largely remained unaffected despite sanctions.
While sharing his insights on commercial aviation at the Morningstar Investment Conference in Chicago on June 26, Tony Bancroft from Gabelli Funds said that he had noticed a significant growth in aircraft orders lately, with both Airbus and Boeing having a 12-year backlog of orders. He believes there are three reasons driving it. The first catalyst, according to him, is China which accounts for 20% of the growth in orders to cater to the growing middle class in both China and India who want to travel more. Another critical factor he cited during his talk was that business travel has finally returned to the 2019 pre-pandemic level. Lastly, Tony highlighted the the rising middle class in the United States, and the world, which is increasing air travel and contributing to the economic growth in the industry.
Furthermore, Bancroft identified Textron as his hot stock pick in the aerospace and defense industry. He believes the stock is undervalued at its current share price of $85, and anticipates its value to hover around the $125 range in the future. Last year in March, the US Department of Defense (DoD) awarded a $1.3 billion contract to the company to develop helicopters to replace the aging Blackhawk fleet.
Another top stock that hedge funds are talking about is Carpenter Technology Corporation, a leading supplier of specialty alloys that holds a market share of roughly 40% in the aerospace industry. It was among the top picks during the Sohn Investment Conference in New York back in April. Mohammed Anjarwala, the managing director of Advent Global Opportunities, shared the following remarks about the company during the conference:
We think Carpenter is one of the best ways to play the growing backlog of planes at Boeing and Airbus, as they ramp up their billing rates.
At the time of the conference, the stock was trading at around $70 per share. Anjarwala forecasted that the value could go up to around $200 per share or 20 times forward P/E. It is currently valued at $107 per share.
Methodology
Insider Monkey’s database of 920 hedge funds was assessed, as of the first quarter of 2024. We have chosen the 10 best aerospace and defense stocks to buy now based on the hedge fund sentiment towards each stock. The stocks are ranked in ascending order of hedge fund holders in each company.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An aeronautics engineer inspecting a model aircraft engine in a factory setting.
Northrop Grumman Corporation (NYSE:NOC)
Number of Hedge Fund Holders: 39
Northrop Grumman Corporation (NYSE:NOC) is one of the largest weapons manufacturers and military technology providers in the world. It is also among the top defense contractors in the industry in terms of revenue and DoD contracts. The company is the manufacturer of the long-range, stealth strategic bomber, the B-21 Raider, for the United States Air Force (USAF), which was formally unveiled in December 2022 and is scheduled to enter service from the mid-2020s onwards. The aircraft, which is still under development, is intended to replace the aging fleet of the B-1B Lancer and B-2 Spirit.
Northrop Grumman Corporation (NYSE:NOC)’s share price was bludgeoned during the fourth quarter of FY 2023, after the B-21 faced a cost overrun worth $1.6 billion, raising concerns among investors about the expense of the program, which has been spiraling since 2015. As a result, the company posted a loss of $1.45 per share against forecasts of EPS of $5.80. The company fared much better and turned things around during the first quarter of 2024, generating $10.1 billion in revenue, which is 9% higher YoY, and an EPS of $6.32 beating analysts’ estimates of $5.83 per share for the quarter. The recovery was driven by the aerospace sector, where sales grew 18% due to a higher volume on the B-21 program and work on mature production programs such as the F-35. Defense systems, mission systems, and space-related sales also experienced growth during the quarter.
However, the crisis late last year on the B-21 Raider program has opened the doors of criticism, with debates on whether the USAF needs the aircraft at all at a time when drone warfare is on the rise, and the country already operates the world’s only stealth bomber, the B-2 Spirit. Rating firm Bernstein is bearish about Northrop Grumman Corporation (NYSE:NOC) and recently its analyst, Douglas Harned, downgraded the stock from Buy to Hold, in line with the ratings maintained by Wells Fargo and RBC Capital. Moreover, according to Insider Monkey, the number of hedge funds that are bullish on the stock has also come down from 45 in Q4 2023 to 39 in Q1 2024.
Despite the challenges with the B-21 program, Northrop Grumman Corporation (NYSE:NOC) remains one of the best aerospace and defense stocks to buy now, with an average price target of $503 per share at an upside of 16.62% from its current level. The company has projected sales of between $40.8 billion and $41.2 billion for FY 2024, owing to sustained demand for its weapons. Furthermore, the USAF has also agreed to a higher cost ceiling for the B-21 Raider in response to Northrop Grumman Corporation (NYSE:NOC) taking a loss last year. The aircraft is currently in the flight testing phase, and on track to enter service.
Overall NOC ranks 9th on our list of the best aerospace and defense stocks to buy. You can visit 10 Best Aerospace and Defense Stocks to Buy Now to see the other aerospace and defense stocks that are on hedge funds’ radar. While we acknowledge the potential of NOC as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NOC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.