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Like most of the stocks in the U.S. markets, Aerospace and Defense companies have sold off during the recent downturn. Now they are oversold, and they are looking for a reason to go upward. If the overall market heads upward, they most likely will too. The most promising stocks I could find in this category are: Precision Castparts Corp. (NYSE:PCP), Goodrich Corp. (NYSE:GR), BE Aerospace (NASDAQ:BEAV), Helix Energy Solutions Group Inc. (NYSE:HLX), and Triumph Group Inc. (NYSE:TGI). All of the above stocks beat the last two quarters in a row. Analysts have raised FY2011 earnings estimates on all of them within the last thirty days. Given the overall direction of the markets during those thirty days, the higher estimates are a true sign of strength.

How oversold are these stocks? In the week of July 28, 2011 - Aug. 4, 2011, the iShares Dow Jones U.S. Aerospace & Defense Index Fund (NYSEARCA:ITA) had outflows of -23.7%, and that was only one week. These are cyclical stocks. They tend to go up and down with the economy. However, it is unclear that the economy is even going into recession.

Goldman Sachs cut its Q3 and Q4 growth estimates to 1.0% and 1.5% respectively. Morgan Stanley cut its world growth estimates to 3.9% for 2011 and 3.8% for 2012. This is bad news, but it still specifies positive growth. After the great sales of airplanes this year by Airbus and Boeing, et al, there will be plenty of work building planes for the foreseeable future. For instance, July’s bookings brought Airbus’ 2011 net orders to 785. This raised its overall backlog to 4,039 aircraft -- the highest total ever.

Boeing is far behind Airbus for 2011 with 268 planes ordered so far. However, it too has a big backlog of orders, with 830 for the 787 alone. The above companies sell to industries besides aerospace. Many of these other industries are also doing well to. An example would be the chemical industry. This industry has been doing well, and it seems likely to continue to do well.

Most can probably agree that these companies are oversold on a macroeconomic basis. Let’s look at some of the “micro” data. The table below contains some of the fundamental financial data for the above companies. The data is from TDameritrade and Yahoo Finance. 

Stock

PCP

GR

BEAV

HLX

TGI

Price

$148.39

$82.73

$31.61

$14.91

$48.20

1-Year Analysts’ Target Price

181.00

$113.48

$50.67

$23.43

$64.79

Predicted % Gain

22%

37%

60%

57%

34%

P/E

20.14

15.57

18.16

36.08

13.02

FP/E

14.23

11.94

11.71

9.20

9.72

Avg. Analysts’ Opinion

1.9

1.8

1.7

2.3

1.8

Miss Or Beat Amount For Last Quarter

+$0.02

+$0.04

+$0.03

+$0.19

+$0.16

EPS % Growth Estimate for 2011

24.10%

33.60%

52.80%

174.50%

25.90%

EPS % Growth Estimate for 2012

19.90%

15.10%

24.40%

25.60%

13.20%

5-Year EPS Growth Estimate Per Annum

14.83%

14.20%

12.83%

12.00%

13.87%

Market Cap

$21.40B

$10.33B

$3.27B

$1.58B

$2.36B

Enterprise Value

$19.72B

$12.15B

$4.20B

$2.33B

$3.49B

Beta

1.34

1.03

1.80

3.12

$1.01

Total Cash Per Share (mrq)

$9.14

$4.14

$1.87

$3.91

$0.74

Price/Book

2.94

2.69

1.78

1.12

1.35

Price/Cash Flow

15.77

10.45

13.39

3.9

7.47

Short Interest as a % of Float

1.57%

1.30%

2.70%

6.62%

8.60%

Total Debt/Total Capital (mrq)

15.67%

38.63%

41.28%

47.65%

42.29%

Quick Ratio (mrq)

1.66

1.15

1.16

2.12

0.57

Interest Coverage (mrq)

55.72

9.07

4.1

3.94

3.98

Return on Equity (ttm)

13.90%

19.74%

10.87%

3.20%

12.52%

EPS Growth (mrq)

79.93%

11.56%

45.33%

147.24%

221.03%

EPS Growth (ttm)

57.17%

31.21%

24.53%

128.24%

69.82%

Revenue Growth (mrq)

21.20%

16.53%

25.83%

13.05%

107.53%

Revenue Growth (ttm)

10.30%

11.17%

19.04%

48.17%

141.30%

Annual Dividend Rate

$1.20

$1.16

--

--

$0.16

Gross Profit Margin (ttm)

51.66%

30.73%

37.14%

21.06%

22.76%

Operating Profit Margin (ttm)

20.47%

14.83%

16.12%

11.98%

11.56%

Net Profit Margin (ttm)

13.91%

9.20%

7.89%

3.51%

5.73%


The first two of the above stocks are large-caps. They are financially more stable and solid. They have better Net Profit Margins, lower debt/capital ratios, and lower short interest. The analysts have on average predicted higher one-year percentage gains for the smaller companies. However, HLX and BEAV have much higher Betas, which means they can move dramatically down (or up) as the market moves. This might scare some people. All of the above stocks have something to recommend them. All seem to be good investments, especially if the market is making a bottom currently. The individual investor just has to decide how much risk he/she is willing to accept.

The charts of the above stocks may give some technical clues about future performance.

The two-year chart of PCP is below:



The two-year chart of GR is below:



The two-year chart of BEAV is below:



The two-year chart of HLX is below:



The two-year chart of TGI is below:



All of the charts show the individual stock as oversold or nearly oversold on the Slow Stochastic sub chart. If the overall market is now making a bottom, these stocks should all move strongly to the upside as the overall market rebounds. Analysts have raised FY2011 earnings estimates on all of them in the last thirty days, and that happened with the overall market falling dramatically. Even with a troubled economy, these cyclicals should gain from here.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PCP, BEAV, TGI over the next 72 hours.

Source: 5 Oversold Aerospace And Defense Companies Bottoming Out