Aerospace Saham

Top 10 Aerospace and Defense Stocks

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Rising Dangers

It is sadly the case that the international order that has prevailed since 1990 and the fall of the Soviet Union is unraveling. From the war in Ukraine to the war between Armenia and Azerbaijan, the war between Israel and Hamas (and maybe more like the USA, Hezbollah, and Iran), to tensions around Taiwan and the China-USA rivalry, the world is becoming a dangerous place quickly.

“This may be the most dangerous time the world has seen in decades.” – Jamie Dimon, JPMorgan CEO

So, in this context, it can make sense for investors to look at the defense industry. The sector has already performed well but might only be at the beginning of explosive growth. This is because, contrary to what we could assume from news headlines, the leading defense ETFs have been rising in price from 2007 to 2019 and have mostly been stagnant since.

A reason behind this relatively slow performance has been that the USA has actually decreased its defense spending if measured as a percentage of GDP in the last few years.

Matching A Growing Demand

The return of industrial warfare in Ukraine has caught the Western defense industry by surprise. To this day, it is still struggling to catch up and produce all the vehicles, missiles, and artillery shells needed to replace depleting stockpiles. And this was before the sudden explosion of violence in Israel:

While this is not good news in the short term, it is good news for the defense industry. The world is rearming and maybe entering a new Cold War. Many armies that had been shrunk, especially in Europe, are now looking to rebuild their forces.

Many investors might be a little uncomfortable with the idea of making money from weapon manufacturers. And, of course, this carries some ethical questions.

Only the dead have seen the end of war. – Plato

But in the end, every nation needs to be able to defend itself. The sector is often considered a “sin stock,” together with tobacco, gambling, alcohol, etc., which tend to create larger returns on investment than other sectors.

Top 10 Aerospace and Defense Stocks

1. Lockheed Martin Corporation

Lockheed is behind some of the most powerful (and expensive) weapon programs in the USA, like the F-35. The stealth plane developed together with Northrop Grumman and BAE Systems suffered a troubled development but is now “debugged” and getting built in large quantities, with demand outpacing production.

(LMT )

While it is active in all branches of the military, the company is mostly active in advanced technologies and aerospace, with aeronautics representing $6.2B of revenues in Q1 2023, missiles & fire control $2.3B (including the now famous in Ukraine HIMARS), rotary (helicopters) $3.5B, and space $2.9B, for total sales of $15.1B total sales.

Lockheed is also active in cyber defense and naval systems (AEGIS anti-air systems and long-range anti-ship missiles).

It is present in the most advanced segment of the defense industry, including AI & autonomous weapons, electronic warfare, hypersonic missiles, laser weapons,

Ever since the massive military build-up of World War 2, Lockheed Martin has been a central part of the US defense industry. This is unlikely to change any time soon. Air superiority is the central tenet of NATO military doctrine, after all.

The company is also likely to be a prime recipient of increasing military spending from the US allies, as illustrated by the recent sales of F-35 to Finland, Switzerland, and Germany, or the 486 HIMARS artillery systems ordered by Poland (more than the USA itself operates).

2. RTX Corporation

Often just called Raytheon, the company is a conglomerate of weapon manufacturer Raytheon, aviation reactors maker Pratt & Whitney, and Collins Aerospace.

(RTX )

The company is present in virtually everything that flies, with 11 million passengers per day moved with Collins Aerospace equipment, a Pratt & Whitney-powered aircraft taking off every second, and half of the world population protected by Raytheon military products (including the air defense Patriot missile system, of which $15B got recently sold to Poland).

Source: Raytheon

On the aircraft component of the business, RTX will be a key supplier to the massive backlog order of 12,500 aircraft between Airbus and Boeing.

The company expects sales to grow by 6-7% CAGR until 2025, with $9B in free cash flow in 2025.

RTX is a very innovative company, with its technologies crucial for air travel, both military and civilian. It is also working on the electrification of air transport and the deployment of sustainable or alternative aviation fuels, as well as the integration of existing systems with AI and advanced sensors. On the military side, Raytheon is also working on hypersonic missiles, a key capability where the US has been somewhat lagging behind Russia and China, with Lockheed Martin the only real competitor.

The war in Ukraine has illustrated the importance of air dominance and air defense in modern wars. And the post-pandemic boom in travel has shown that the desire for air travel is not going anywhere. So, it is likely that RTX will continue to perform well as the central supplier of air travel and air defense systems in the USA and NATO. It makes investors a good choice for a defense company with extensive civilian activities.

3. Northrop Grumman Corporation

Northrop Grumman is a defense aerospace company most famous for the creation of the iconic B-2 stealth strategic bomber, each one costing almost a billion dollars. This more than 20-year-old design is going to be replaced by the B-21, which is still in development.

(NOC )

The company is also at the very edge of space technology and has notably worked on the state-of-the-art James Webb Space Telescope.

Source: Northrop

The company derives most of its revenues from space and aeronautics systems, with another large segment, the mission systems division, covering a wide array of sensors, cyberdefense software, secured communication, and C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance). It is also a leading producer of ammunition, from small caliber to guided projectiles and large caliber.

 

Source: Northrop

The company is looking forward to its position as a supplier of advanced weapons, with the development and deployment of autonomous weapons systems like the X-47B, helicopter drone Fire Scout, surveillance drones Global Hawk and MQ-4C Triton, or future autonomous strike drones.

Source: Northrop

The company is at the edge of the development of direct energy weapons (lasers), electronic warfare, anti-drone systems, and intercontinental ballistic missiles.

Where companies like RTX and Lockheed provide the bulk of the US Air Force punch (fighter jet, missiles, air defense), Northrop Grumman is providing the most advanced capacity, from space to integrated command and stealth heavy bombers. So in many ways, an investment in the company is a bet on the US Army keeping its doctrine of being an ultra-technological military force, driven by innovation, cutting-edge capacities, and overwhelming technological advantage.

With the growing importance of drone and electronic warfare, Northrop will likely be increasingly central to the US’s both offensive and defensive capabilities, and with its new stealth bombers a key factor in keeping pace with peer adversaries like Russia and China.

4. General Dynamics Corporation

Some of the most important (and expensive) weapons systems in the US are aerospace assets. But time and time again, military strategists rediscover the simple truth that any war is first and foremost won on the ground and at sea. From infantry to tanks and artillery and from ships to submarines, the most cost-efficient way to deploy firepower is at the ground or sea level.

(GD )

General Dynamics is behind the Stryker armored vehicle, the M1 Abrams tanks, the Arleigh Burke-class guided-missile destroyers, and Virginia & Columbia-class nuclear-powered submarines. It also has a civilian line of business with its Gulfstream private jets.

Every weapons system of General Dynamics is central to the operations of the US Army and Navy and can often be described as the backbone of their military power.

On the naval side, General Dynamics is the sole supplier of nuclear submarines besides Huntington Ingalls Industries (see below for a detailed company profile). The Arleigh Burke class has no less than 73 active ships as of October 2023, with nineteen more planned to enter service.

On the land weapons side, the M1 Abrams tank entered service in 1980 and is one of the heaviest tanks in service worldwide, and more than 10,000 units were produced. Around 4,900 Striker vehicles have been produced since 2000.

The war in Ukraine saw a significant part of NATO, which was still operating Soviet-era equipment or German-made tanks, give these weapons to Ukraine. This has opened a significant export market for General Dynamics, as illustrated by the large sales to Poland (a $4.75B deal) and maybe soon Romania.

On the other side of the world, the mounting rivalry with China has made the US worry that it might fall behind in naval capacity, with China forecasted to become the largest submarine fleet by 2030. This might be difficult to solve in the short term, with the military shipyards of General Dynamics and Huntington Ingalls often described as already operating at maximum capacity. This is nevertheless an encouraging trend for General Dynamics, which will be in a prime position to help build up the US Pacific fleet.

Both the war in Ukraine and now in Israel demonstrated the importance of “ordinary” military assets in the global security architecture. Naval capacities and boots on the ground matter. So investors in General Dynamics can count on NATO allies rearming and growing rivalry with China to keep the company’s order book full, and maybe even bigger than its production capacity in the short and medium term.

5. BAE Systems plc

BAE is the leading defense company in the UK, the largest manufacturer in the UK, and the largest defense contractor in Europe (7th largest globally).
Despite being a UK company, BAE makes most of its revenues in the US, with Europe its 3rd largest market and Saudi Arabia the 4th.

Source: BAE Systems

The company has diversified activities, with air and maritime systems the largest segments, followed by electronic systems (ES), platforms & services (P&S), and Cyber & Intelligence (C&I). The total order backlog stands at $83B.

Source: BAE Systems

Among its most important programs are the Eurofighter jets, the participation in the F-35 program, the Dreadnought, and Astute class submarines.

In the naval segment, the recent AUKUS (Australia, UK, USA) deal has awarded BAE £3.95B for the next stage of the program regarding nuclear submarines.

On land, BAE has been selected to provide the Armored Multi-Purpose Vehicle (AMPV), replacing the Vietnam War-era and legacy M113 Family of Vehicles in the US Army.

The Ukraine war has suddenly made vital the capacity of NATO’s industrial base to produce enough “basic” 155m artillery shells, with BAE, a supplier of this ammo, behind Reihnmetal (see below for a more detailed description of that company) and production capacity way below what is needed, with a backlog measured in decades.

Source: BAE Systems

BAE is looking to acquire American Balls Aerospace for $5.55B, which will expand BAE’s reach in space technology, both civilian and military.

The company is innovating in technologies like Virtual and Augmented Reality, advanced ammunition, cyber defense, electronic warfare, drones, and surveillance. BAE also works on civilian electrification applications, including hybrid and electric aviation.

The AUKUS deal symbolizes the growing integration of the UK and Australian defense industries with the American one. This trend should persist in the context of rising international tensions, giving new overseas opportunities for BAE. This makes the company one of the prime European defense contractors while also being deeply intertwined with the American defense budget, shielding it from the risk of EU defense spending falling short.

6. L3Harris Technologies, Inc.

L3Harris is a key supplier to the defense industry. It generated 60% of its revenues in 2022 from the US Department of Defense (DoD), 20% from international defense orders, and 20% from the civilian industries.

(LHX )

It sells solutions in integrated mission systems (sensors, command center, etc…), space, and communication systems. The company enjoys a leading position in all domains of air, land, space, sea, & cyber, with notably Harris controlling 45% of the global tactical radios market, several times larger than the next competitor.

Source: L3Harris

In many ways, L3Harris systems are “invisible” to the public at large, either located in satellites in orbit or not as photogenic as tanks and destroyers, with things like radios, antennas, steering controls, radar, sonars, optics, etc. Such equipment is nevertheless absolutely vital for almost every modern military equipment in an increasingly connected battlefield.

The company is expanding through acquisition, with the purchase in July 2023 of hypersonic missile reactor developer Aerojet Rocketdyne for $4.7B, adding a 4th department to the company.

Due to its presence in most NATO equipment, L3Harris will likely benefit from the general build-up of new or upgraded equipment, no matter what weapon system is selected by a given nation.

This makes it a good stock pick for investors looking for exposure to the defense sector but uninterested in learning about the prospect of specific weapons or which branch of the military might be the most interesting to invest in.

7. Dassault Aviation société anonyme (AM.PA)

With the largest weapons manufacturers being American, it can be easy to forget that other countries are large weapons manufacturers and exporters. An important one is France, with Dassault Aviation as the leading company in the country. It is part of the Dassault Group, which also includes the larger Dassault Systemes, media group Dassault Figaro, as well as public utility Veolia.

The most famous and important weapons system of Dassault is the French fighter jet Rafale. The fighter jet has recently seen growing hope of further exports to the Middle East, notably an additional 24 planes to Qatar, with the recent events in Israel making it hard to evaluate if they will increase or decrease the chances of such a deal going through. 42 Rafale were also sold to Indonesia in 2022, and India selected the Rafale for its naval forces in 2023, adding to its existing 26 planes.

In total, Dassault Aviation saw 80 new Rafale orders in H1 2023 and has an existing backlog of 164 planes, of which 125 are for export. This large backlog gives the company 10+ years of visibility.

Dassault is also the producer of the Falcon business jets, with 2,100 units in service.

Besides its own sales, Dassault Aviation owns 25.23% of the other major French defense contractor, Thales (HO.PA), with activity in aerospace, software, and cybersecurity.

Unlike US jet fighter manufacturers, Dassault has a strategy of joint production with third-party countries, including non-NATO countries like India or Indonesia. This contributes greatly to its recent export successes, with many countries eager to develop their domestic defense industries and partially localize the production of key advanced weapons systems, especially in aeronautics and aerospace.

This trend of international collaboration is also visible in the nEUROn program, the first European Unmanned Combat Air Vehicle (UCAV), developed in collaboration with the Italian, Swedish, Spanish, Greek, and Swiss governments.

The European defense sector is booming in the aftermath of the war in Ukraine, and the need for all NATO members to boost their defense spending above 2% of GDP. Combined with the success of Dassault Aviation’s export strategy, this makes the company a good defense stock diversifying out of the US-centric approach of many defense stocks.

8. Rheinmetall AG

Rheinmetall is the largest defense contractor in Germany. The country has long had a position of minimizing its armed forces after the fall of the Soviet Union. The invasion of Ukraine changed that, with Germany looking to quickly ramp up its spending to 2% of GDP, and already more than doubling its defense spending between 2014 and 2024.

Source: Rheinmetall

The company’s “main products” are tanks (Leopard and, in the future, Panther), military trucks, air defense systems, and unmanned air assets (drones), with sensors and electronic systems as well.

Source: Rheinmetall

Rheinmetall is also the largest producer of artillery shells in Europe, especially the critical 155mm caliber, with facilities in Germany and South Africa, and a new one being built in Hungary. It also produces a loitering munition (suicide drone), HERO.

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Jonathan adalah seorang peneliti biokimia yang telah bekerja di bidang analisis genetik dan uji klinis. Sekarang, ia adalah seorang analis saham dan penulis keuangan dengan fokus pada inovasi, siklus pasar, dan geopolitik dalam publikasinya 'The Eurasian Century".