In reviewing yesterday’s advance Durable Goods report (pdf), one segment jumped out at us: Defense aircraft and parts. A look at the table below, which presents the year/year change in shipments, orders, inventories and backlog shows that something interesting may be going on.
Shipments have been poking along at barely above last year’s numbers (and actually below last year in June.) The lag from orders to shipments can be extended in aircraft (less so for parts) so the decline in orders from April was a predecessor to June’s decline in shipments. This was also foretold in the stock prices, which peaked in March (ahead of the rest of the market) and in most cases have not fully recovered.
So what has happened to orders since April? They have been rising at an accelerating pace. Our bet is - you guessed it - defense aircraft and aircraft parts should have strong shipments ahead. Meanwhile, the performance of related stocks has been mixed this year. Names worth researching include L-3 Communications (NYSE:LLL), Rockwell Collins (NYSE:COL), Precision Castparts (NYSE:PCP), Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT) and Teledyne (NYSE:TDY).
Defense stocks comparison chart: