5 Defense Stocks To Gain From UTX-Raytheon Merger
Zacks Investment Research | Jun 11, 2019 08:01AM ET
Defense stocks moved higher on Jun 10 after United Technologies (NYSE:UTX) and Raytheon (NYSE:RTN) agreed to merge. The new entity is expected to generate annual sales of around $74 billion. Further, it will become the second-largest U.S. aerospace and defense company after Boeing (NYSE:BA) once the merger is completed in 2020. This is only the most-recent such agreement for a space witnessing a spate of deals.
In fact, defense stocks have emerged as power-packed performers this year. An end to budget sequestration has proven to be beneficial for the sector. With defense spending likely to remain high even if a change of guard takes place at the White House, it makes sense to add select defense stocks to your portfolio at this point.
United Technologies-Raytheon Deal Extends Spate of Mergers
Following the completion of the merger, the new entity, slated to be called Raytheon Technologies Corp will be valued at around $100 billion. This is significantly lower than the two companies’ combined market value of $166 billion, since it takes into account planned spinoffs. The deal will be completed in the first half of 2020 once United Technologies hives off its Carrier climate control and Otis elevator businesses.
But the merger of United Technologies and Raytheon is only the latest for a sector, which has been witnessing furious M&A activity. Last year, United Technologies bought Rockwell Collins (NYSE:COL) for $30 billion in its quest to become a pure-play aerospace and defense stock. Further, Northrop Grumman (NYSE:NOC) decided to acquire Orbital ATK for $9.2 billion while Harris (NYSE:HRS) and L3 (NYSE:LLL) merged in a deal valued at $33.5 billion.
Defense Among the Hottest Plays for 2019
As of Jun 10, the S&P 500 Aerospace and Defense sector was up 23% year to date, taking into account dividends reinvested. In contrast, the broader S&P 500 has gained 16% over the same period. The sector has outperformed the broader index on a dividends reinvested basis over the last five, 10 and 15 years.
The reasons for this pattern are not so mysterious. Commercial air travel is a terrific long-term bet since its growth remains robust and largely unhindered. And defense spending is likely to remain substantial regardless of who controls the Congress or White House. The sector has received a strong boost ever since the end of sequestration in 2015, a factor which had weighed on sales growth of the sector for quite some time.
In fact, President Trump has announced a substantial defense budget proposal of $750 billion for 2020. The Republican-controlled Senate is likely to approve of this proposal. And while the Democrat-heavy Senate will certainly press for a reduction, the final figure is likely to remain significantly large. The House Armed Services Committee is discussing a proposal of around $733 billion.
Our Choices
The United Technologies-Raytheon merger is the latest entrant in the series of M&A deals the aerospace and defense sector is witnessing. Such activity is unlikely to die down soon given that defense remains an attractive space following the end of budget sequestration in 2015.
Investing in select defense stocks looks prudent at this point. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.
HEICO Corporation (NYSE:HEI) is a designer, manufacturer and seller of defense, aerospace and electronic related products and services.
HEICO Corp flaunts a Zacks Rank #1 (Strong Buy). The company’s expected earnings growth for the current year is 22.5%. The Zacks Consensus Estimate for current-year earnings has moved 3.8% north over the past 30 days.
Astronics Corporation (NASDAQ:ATRO) is a designer and manufacturer of aerospace, defense and electronic products.
Astronics’s expected earnings growth for the current year is 35.8%. The Zacks Consensus Estimate for current-year earnings has improved 17.1% over the past 30 days. It sports a Zacks Rank #1. You can see Zacks Investment Research
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