Last month, U.S. military and aerospace industry S&P Aerospace & Defense Select Industry Index reached the highest level in the last ten years — 10 345,33 points. In the spring of 2007 it grew by 168%, beating the S&P 500 index, which during this time increased by only 64.5%. The positive dynamics of the defense sector increased from 22 September 2014, when the United States officially launched a military operation in Syria against the terrorist organization ISIS (banned in Russia) — since then the index has risen by 35.8%. Now this indicator, which includes shares of the largest aircraft and defense companies in the U.S., continues to trade near a ten year high.
Analysts surveyed expect further growth of securities in the defense sector. They attribute this primarily to a further increase in government orders for defense products for the military campaign against ISIS. In February, the President of the United States Donald trump has proposed to Congress to increase Federal spending on defense by 10%, or $54 billion, reminds the head of the analysis financial markets “KIT Finance Broker” Vasily Koposov.
“The prospect of a military enterprise for the investor depends on how many years it has orders. According to the policy of trump, the lack of state orders in the coming years will not be”, — he said. The head of the analytical center of the St. Petersburg stock exchange Pavel Pakhomov added that the military industry is one of the largest beneficiaries of the policy trump. Since his election as President on November 8 of last year, the sector outperforms the broader market — military benchmark rose 15% against 10% in the S&P 500 index. “When trump shares of defense companies may from time to time to show a drawdown, but mostly their dynamics will be better than the market”, — predicts expert.
Quotes military-industrial companies can also support the escalation of the situation in the middle East, says head of Department of trading operations IK “freedom Finance” Igor Kleshnev. April 6, the U.S. Navy launched a missile attack on the airbase of the Syrian government forces, releasing more than 50 cruise missiles “Tomahawk”. Immediately after the attack action manufacturer of missiles Raytheon is the fourth largest defense industry in the U.S. with a market capitalization of $44.5 billion rose by 1.47%, while the index of the defense sector the S&P, in turn, jumped 0.7%. A similar reaction of the market was followed by the attack by American aircraft on ISIS in Afghanistan on 13 April, during which were thrown the so-called mother of all bombs — the most powerful non-nuclear bomb weighing 14 T. After hitting the shares of aerospace giant Boeing Co., which constructed the bomb, increased in price by 1.94%, while the index of the defense sector — 1.46%.
A seven-iron
In settlement base of index S&P Aerospace & Defense Select Industry Index includes the shares of 37 companies. In addition to Boeing and Raytheon among them there are such giants, as a manufacturer of fighter planes, Lockheed Martin, tankostroitelnye General Dynamics shipbuilding Corporation and Northrop Grumman. American investors these five issuers called “Big five”, as they are the major producers of weapons and military equipment not only in USA but in the world — the capitalization of each of them exceeds $40 billion Since the beginning of this year, Boeing shares rose by 12.47 percent, to $178,4, Raytheon — 5.3%, to $152,88, Lockheed Martin — by 6.44% to $269,63, General Dynamics — by 6.84% to $187,75, and Northrop Grumman — by 3.77%, to $243,74 per share. The S&P 500 index during the same period grew by only 3.56%. The yields of these five securities for the year 2016 amounted to 11-28%, while investments in the S&P 500 has brought investors 13%. According to the consensus forecast of analysts at Zacks Investment Research, in the next 12 months shares of the “Big five” will continue to grow. So, quotes Boeing can go up another 6.5% from the current level, Raytheon — on 8,25%, Lockheed Martin — 7.68% and General Dynamics and Northrop Grumman — 7.5 and at 6.67%.
Among the smaller capitalization companies in the portfolio index allocated to military equipment manufacturers aerospace TransDigm Group and Esterline Technologies — they have become leaders in sales growth over the past 12 months, ahead of this indicator the “Big five”. According to FactSet, the revenue of these companies increased by 16.4 and 11.8%, respectively. But the dynamics of their shares was weaker than the giants: quotes TransDigm Group dipped with the beginning of the year by 5.28%, and Esterline Technologies by 4.9%. However, analysts at Zacks Investment Research see they have a significant potential for growth in the next year or 24.9 and 12.05%, respectively.
What to buy
The financiers interviewed , the preference shares of the “Big five”, as these companies receive the large orders from the U.S. Department of defense. Igor Kleshnev recommends to invest in the securities of the Corporation, General Dynamics and Northrop Grumman. First got the order for the development of a new generation of tanks for the American army. If successful, General Dynamics can receive deliverable contract for $10 billion, Northrop Grumman is already fulfilling an order for a new generation of ships LCS — contract value now stands at $68.8 million, but subsequently it may rise to $812 million “These orders can be a source of long-term growth of these two companies. Moreover, they have good fundamentals. But General Dynamics still consistently pays dividends,” says Clusnet.
Pavel Pakhomov from the analytical center of the St. Petersburg stock exchange considers the most promising Boeing shares. According to him, the Corporation has significantly increased the volume of production and no shortage of new orders. “Boeing by more than three aircraft per day. This production cycle is more typical for automotive companies, not aerospace,” explains the expert. Agree with him Vasily Koposov. According to him, from the point of view of operating results, Boeing looks like a company with a stable business, so its shares are quite suitable for purchase.
In March the Corporation received a contract worth us $3.28 billion for the supply of combat helicopters AH-64E, related equipment and services for the army of Saudi Arabia. This will ensure that the company’s cash flow, experts say. In addition to Boeing stock a good investment can become a paper Lockheed Martin, which has recently developed a new combat helicopter and can obtain a large order for him. However, in the case of stock, the investor should exercise caution — perhaps they are overvalued by the market, warns Pakhomov.
Investment in the defence sector involve a number of risks. The main one is a sharp change in the geopolitical situation or foreign policy trump says Igor Kleshnev. In addition, if any of the defense industry cannot fulfill the contract, this will negatively affect his stock. In turn, Deputy General Director for investment analysis of IR “Zerich capital Management” Andrey Vernikov believes that all of this time paper defense companies could demonstrate rapid growth. This means that now, after receiving large orders, they may not be a significant potential. “Investors buy on rumors and sell on facts. Perhaps now is the time to take profits”, he concluded.
