Few would disagree with my premise that we are living in dangerous times. Israel and Iran are poised on the precipice of conflict. The world's oil supplies are threatened by a bellicose Iranian theocracy, determined to develop nuclear weapons. North Korea is under new leadership, anxious to establish its bona fides-- and does so by threatening war against its neighbor to the south, the Republic of South Korea. Regardless of one's political views, the fact that our defense budget is being dramatically reduced in this geo-political maelström is a questionable strategy at best. As an investor, I want to analyze five major diversified aerospace and defense companies. We will see how they are faring in this environment and determine if they are a viable investment.
I'll begin with the only foreign company in the group, AerCap Holdings N.V. (AER), a firm based in the Netherlands. AerCap is trading at around $13 and has a market cap approaching $2 billion. It has a price/earnings ratio of 10.98 and a price/earnings growth ratio of 0.54. It also sports an attractive fractional price to book of 0.80. Return on equity stands at 10.56, with quarterly year-over-year revenue growth reported at -18.00%. Quarterly year-over-year earnings are not available, although trailing twelve month net income stands at $219.57 million. The company has $6 billion in long term debt and a very dismal debt/equity ratio of 276.21. The current ratio is more palatable at 1.25 but clearly the company has fiscal challenges. AerCap is not a manufacturer-- and happily, from the perspective of this article-- is not involved in defense. Its aerospace pursuits are civilian in nature.
GenCorp Inc. (GY) is trading at about $6 with a modest market cap of $331 million. It is primarily involved in missile propulsion, missile defense and strike systems, although it also has a real estate segment unrelated to defense. The stock has a stratospheric price/earnings ratio of 112.60. The forward price/earnings ratio is projected to be 21.54, suggesting optimism among analysts for a better year ahead. The price/earnings growth ratio is not available, nor is price to book and return on equity. Quarterly year-over-year revenue growth is pegged at 11.40% and a quarterly year-over-year earnings value is not available. Trailing twelve month net income is $2.90 million. Although no debt/equity ratio is available, a glance at the balance sheet reveals a company awash in debt. The current ratio of 1.34 is the only positive fundamental I see from GenCorp.
Now we shift our attention to Northrop Grumman Corporation (NOC) which is trading at about $60 and boasts a market cap of around $15 billion. Northrop has a favorable price/earnings ratio of 7.98 but that is followed by a disturbing price/earnings growth ratio of -18.24. Price to book is a comfortable 1.47, as is the return on equity of 17.55%. Quarterly year-over-year revenue and earnings growth are -5.80% and 45.70% respectively. Northrop demonstrates financial strength and soundness with a debt/equity ratio of 38.20 and a current ratio of 1.26. Northrop even pays a dividend, yielding 13.90% against a payout ratio of 26%.
Next up is Raytheon Company (RTN). Raytheon is trading at around $50 which is just 9.53 times trailing twelve month earnings. It also has an attractive price/earnings growth ratio of 1.21 and a price to book of 2.11. This large cap ($17.30 billion) also offers an excellent return on equity of 20.81%. Quarterly year-over-year revenue and earnings growth are -6.40% and 18.30% respectively. Soundness and financial strength are confirmed by a debt/equity ratio of 55.22 and current ratio of 1.52. Raytheon also offers a modest dividend yielding 3.40% against a payout ratio of 40%.
Our final stock is Textron Inc. (TXT) which trades near $28 per share. Textron's market cap is almost $8 billion. Textron operates in 5 segments, 2 of which-- Bell and Textron Systems-- relate directly to defense. Although the price/earnings ratio is 35.13, high by any standard, the price/earnings growth ratio is a promising 0.40 with a forward price/earnings ratio of 12.17. Price to book is fair at 2.81 and return on equity is a somewhat disappointing 8.47%. Quarterly year-over year revenue growth is 4.10% with earnings growth unavailable. Textron's debt/equity and current ratios are 89.58 and 1.80 respectively. Textron pays a very modest dividend yielding 0.30% supported by a payout ratio of 10%.
In our review of these five companies, I believe only two emerge as viable investment opportunities from a value investor's perspective. I would recommend Raytheon Company and Northrop Grumman Corporation based upon solid fundamentals. I am not placing much weight on Northrop's negative price/earnings growth ratio as it is unfairly impacted by year-over-year negative earnings growth. Northrop's dividend yield is excellent and the numbers suggest it is also sustainable.
Textron has one foot in defense and another in civilian applications. This may be an attractive stock from the standpoint that it offers opportunities in both worlds. This is not to be construed as a recommendation, but rather, an observation. If you share my view that it is not a question of if but when conflict will erupt in a major way in the Middle East, defense companies may be a winning investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.