In this series of articles, I will be taking a look at various industry sectors and selecting what I believe will be outperforming stocks for 2015. In part 1, I will review the Aerospace & Defense industry sector and select my favorite five stocks for 2015.
The first step I took to narrow down the list of possible options was to look at the earnings over the past five years of 47 stocks within the industry sector with market caps over 100 million. I removed stocks with a decline in earnings over this time period, which gave me a list of the following 30 stocks:
- AAR (NYSE:AIR)
- AeroVironment (NASDAQ:AVAV)
- Alliant Techsystems (ATK)
- Astronics (NASDAQ:ATRO)
- B/E Aerospace (BEAV)
- Boeing (NYSE:BA)
- CAE (NYSE:CAE)
- Cubic (NYSE:CUB)
- Curtiss-Wright (NYSE:CW)
- Embraer (NYSE:ERJ)
- Engility Holdings (NYSE:EGL)
- General Dynamics (NYSE:GD)
- Heico (NYSE:HEI)
- Hexcel (NYSE:HXL)
- Honeywell International (NYSE:HON)
- Huntington Ingalls Industries (NYSE:HII)
- Lockheed Martin (NYSE:LMT)
- Moog (NYSE:MOG.A)
- Northrop Grumman (NYSE:NOC)
- Orbital Sciences (ORB)
- Precision Castparts (NYSE:PCP)
- Raytheon (NYSE:RTN)
- Rockwell Collins (NYSE:COL)
- Sparton (NYSE:SPA)
- TASER International (TASR)
- Teledyne Technologies (NYSE:TDY)
- Textron (NYSE:TXT)
- Transdigm Group (NYSE:TDG)
- Triumph Group (NYSE:TGI)
- United Technologies (NYSE:UTX)
I then took that list of stocks and checked the revenue growth of each over the past two years. I removed any stocks that had flat (less than 1%) growth or saw a decline in revenue over the past two years. This left me with a list of 20 stocks within the industry sector.
My next move was to examine the trailing PEG ratio of each of the remaining stocks. I removed any stock that had a PEG ratio over 1 to focus specifically on undervalued stocks. This left me with the following 10 stocks: Alliant Techsystems, Astronics, B/E Aerospace, Boeing, Embraer, Honeywell International, Huntington Ingalls Industries, Moog, Sparton, and Teledyne Technologies.
The next set of data I reviewed was the Fundamental and Value Scores for each of the ten remaining stocks. These scores are calculated by YCharts and I have found them to be very useful when researching investment options. More details on each of the scores can be found here and here.
|Fundamental Score||Value Score|
I removed any stock that did not have at least a 5 or higher for both scores. This left me with five stocks remaining.
My next step was to look closer at each stock remaining that passed all previous criteria and determine whether or not there were any reasons to eliminate them as great stock candidates for 2015. In doing so, I reviewed the financials of each company, the most recent quarterly report transcripts, and searched for any news items that warranted concern.
In its latest quarter, Alliant Techsystems posted 11% growth in revenue, 8% increase in operating profit, and 4% growth in earnings per share compared to the same period last year. Sales increased across each of the company's business groups in the quarter. The company's backlog sits at $7 billion. The company's CEO had this to say about the company's recent successes in the quarter:
In the quarter, ATK secured key contracts, both domestic and international, and completed significant milestones that support the company's long-term growth strategy. We recorded year-over-year increases in sales, operating profit and record-level EPS.
Set for late January, is a merger between Alliant Techsystems and Orbital Sciences with a proposed spinoff of ATK's Sporting Group business.
In its latest quarter, Boeing posted 7.5% growth in revenue and an increase in earnings per share from $1.80 a year ago to $2.14. The company saw its largest revenue growth come from its Commercial Airplanes segment, while its Network & Space Systems division saw a 9% drop in revenue.
Even though there have been a few negative news items related to Boeing recently:
- Boeing is set to cut production of its 747-8 jetliner as demand for the product slows.
- There is speculation that Boeing is falling behind in its scheduled deliveries of its 787 Dreamliner.
- FAA has proposed a mandatory sensor fix for Boeing's 787 Dreamliner.
The majority of recent news has been promising related to the company's future health.
- Boeing recently raised its share buyback program by $2B and increased its quarterly dividend by 25%.
- Boeing is scheduled to deliver 754 commercial aircraft in 2015 (a 5.5% increase over prior year numbers).
- New spending bill will provide new funding for defense contractors including Boeing.
- Boeing continues to run ahead of Airbus in terms of 2014 orders.
In its latest quarter, Embraer posted declines in both revenue (a 3.9% decrease compared to prior year) and earnings (negative earnings for the quarter). The company does maintain a strong backlog that ended the quarter at $22.1B (a company record).
Although the most significant factor related to the company's poor earnings in its most recent quarter was related to a higher income tax expense, there are a number of worrisome factors concerning Embraer's near term future results.
- The company faces cancellation/delay of delivery orders.
- A five-day strike in November halted production during that time.
While, there are still many positives to the company, there are some concerns as the company forecasts being on the lower end of meeting delivery estimates in the next quarter.
In its latest quarter, Honeywell International posted a 4.8% increase in revenue and 19% increase in earnings per share compared to the same period last year. The company's focus on new products and technologies has helped it achieve the company's organic growth.
The company recently lowered its Q4 sales guidance, while reaffirming its earnings guidance. The company still expects full year earnings per share to be in the $5.50-$5.55 range with next year's earnings increasing to the $5.95-$6.15 range. Back in October, the company increased its quarterly dividend by 15% and the company reported a few news items last month that help show the company's growth should continue in the near future.
- Honeywell International was selected as the engine supplier for Textron's AirLand Scorpion aircraft.
- Honeywell International is upgrading operations at two refineries to improve efficiency and reduce maintenance costs.
In its latest quarter, the company posted a 5% increase in revenue and an increase in adjusted diluted earnings per share from $1.17 last year to $1.67. The company's backlog at the end of the quarter was $22.8B. The company's operating margin increased by 697 basis points compared to prior year. The company increased its quarterly dividend by 100% and appears poised to continue rewarding shareholders as the company focuses on a long-term view of its success.
With investments in new business areas and existing facilities, the company seems to have a strong sense of its long-term plans.
Out of the five last remaining stocks, Embraer is the one stock that gives me pause, as I look closer at it. While the company does have a strong backlog, it also has several concerns as it struggles with higher margins in a few of its business segments. The company is the only one out of the five to have decreased its dividend in the past five years and looking at the charts below, you can see it also offers the lowest returns on assets, equity, and invested capital.
Even though Embraer is attractively priced, I believe that its recent poor quarter performance along with items that may negatively impact next quarter (the strike and possible order cancellation/delays), I feel that Embraer may have a difficult time outperforming the industry sector in general.
I believe the other four companies all have several positive factors in their favor that will help their stocks perform well in 2015. That is why Alliant Techsystems, Boeing, Honeywell International, and Huntington Ingalls are my top Aerospace & Defense stocks for 2015. For part 2 of this series, I will be reviewing the Air Freight & Logistics industry sector. As always, I suggest individual investors perform their own research before making any investment decisions.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.