We recently compiled a list of the 11 Undervalued Aerospace Stocks To Buy According to Hedge Funds. In this article, we are going to take a look at where L3Harris Technologies, Inc. (NYSE:LHX) stands against the other undervalued aerospace stocks.
According to a new report published by risk intelligence company, Verisk Maplecroft, the number of conflict zones worldwide has increased by nearly two-thirds over the past three years, with wars and unrest intensifying. Ukraine, the Middle East, and parts of Africa have been the most affected regions, with no immediate end to most conflicts in sight.
READ ALSO: 8 Best Small Cap Defense Stocks to Buy Now and 8 Best Military Drone Stocks To Buy According to Analysts.
On November 19, Kyiv marked 1,000 days since the Russian invasion in early 2022. The Middle East is in flames, in what is being described by defense experts as the region’s worst crisis since the Arab-Israeli War in 1973, with the battle spreading from Gaza to Lebanon in continuation of Israel’s response to the October 2023 Hamas-led attack on the country.
While the human impact of these conflicts has been tragic, aerospace companies in the defense sector have profited as demand for fighter jets and autonomous aerial vehicles surged. Several notable contractors have thrived over the last two years, with substantial gains in their share price, as countries rushed to bolster their air defense. An aerospace and defense ETF issued by iShares had gained over 20% year-to-date as of the close of day on December 6.
When the war in Ukraine broke out, industry experts anticipated that Western sanctions on Russia would impact the aerospace sector. The country was the source of around 30% of the titanium used by major engine makers to power fighter jets and commercial aviation. However, the supply of this key material from Russia has largely remained unaffected.
Additionally, the commercial aerospace sector is also showing signs of resurgence as international travel returns to pre-pandemic levels. While sharing his insights on commercial aviation at the Morningstar Investment Conference in Chicago in June, Tony Bancroft from Gabelli Funds stated that he had noticed a significant growth in aircraft orders, with two major manufacturers having a 12-year backlog of orders.
He believes three reasons are driving it. The first catalyst 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. The second critical factor he cited was business travel returning to the 2019 pre-pandemic level. Lastly, Bancroft highlighted 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.
Methodology
We sifted through screeners to identify stocks in the aerospace and defense industry with a forward price-to-earnings ratio of under 25 as of Friday, November 29, 2024, the close of the day. From there, we selected the 11 aerospace stocks with the highest number of hedge fund investors, based on Insider Monkey’s database of over 900 prominent hedge funds as of Q3 2024. The 11 undervalued aerospace stocks to buy have been ranked in ascending order based on the number of hedge funds holding stakes in them.
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).
A military jetfighter against a deep blue sky with the sun behind it.
L3Harris Technologies, Inc. (NYSE:LHX)
Forward Price to Earnings Ratio: 17.18
Number of Hedge Fund Holders: 40
L3Harris Technologies, Inc. (NYSE:LHX) is an American defense company, known for its wireless and night vision equipment, command and control systems, avionics, and terrestrial and spaceborne antennas. It was formed in 2019 after a merger between Harris Corporation and L3 Technologies.
In June, the company received a $34 million contract from the United States Air Force to modernize the B-52 Stratofortress bomber by consolidating the functions of the electronic warfare officer and navigator into one position. Earlier in the year, L3Harris Technologies, Inc. (NYSE:LHX) was awarded a $919 million contract to design and build satellites for the Space Development Agency to provide missile warning coverage. High-value contracts such as these demonstrate the company’s significance in the aerospace and defense industry.
On October 25, L3Harris Technologies, Inc. (NYSE:LHX) announced financial results for the third quarter of 2024. Revenue was posted at $5.3 billion, up 8% from last year. Operating margins increased by 70 basis points to 15.7%, driven by continuing program executions and strong operational performance, with significant contributions from LHX NeXt. Non-GAAP diluted EPS was $3.34, growing 5% year-over-year.
The company is witnessing strong demand across the board, with total awards of over $7 billion in Q3. This included two contracts for the Navy – a $600 million next-generation jammer contract and a $1.2 billion IDIQ contract to support the P-8A Poseidon fleet. These awards have resulted in LHX having a book-to-bill ratio of 1.4, with all business segments delivering a ratio of at least one. The company’s backlog has reached a record $34 billion.
After robust results in Q3, L3Harris Technologies, Inc. (NYSE:LHX) has raised its guidance for the full year. It now expects an annual revenue between $21.1 million and $21.3 billion, with a segment operating margin of 15.5%. EPS is anticipated to be in the range of $12.95 to $13.15 per share. Wall Street analysts have a consensus Buy rating for the stock, with an average share price upside potential of over 16%.
As per Insider Monkey’s database for Q3 2024, 40 hedge funds held a stake in the company. This, coupled with its low forward P/E ratio, makes L3Harris Technologies, Inc. (NYSE:LHX) one of the top undervalued aerospace stocks to buy according to hedge funds.
Overall LHX ranks 5th on our list of the undervalued aerospace stocks to buy according to hedge funds. While we acknowledge the potential of LHX 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 LHX 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.