The fiscal 2024 National Defense Authorization Act calls for $886.3 billion in U.S. military spending, up 3.3% from 2023 levels. The ongoing war in Ukraine, tensions between China and Taiwan, and escalating conflicts between Israel, Iran and Hamas in the Middle East may force the U.S. government to increase defense industry investment in coming years, however, which could serve as a tailwind for defense sector earnings.
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Defense stocks are attractive investments because they often have predictable, long-term government contracts. Here are eight defense stocks to buy with big upside potential, according to Morgan Stanley:
| Stock | Implied upside over June 3 close* |
| TransDigm Group Inc. (ticker: TDG) | 15.7% |
| Northrop Grumman Corp. (NOC) | 28.9% |
| L3Harris Technologies Inc. (LHX) | 22% |
| Howmet Aerospace Inc. (HWM) | 18.2% |
| Textron Inc. (TXT) | 8.9% |
| Curtiss-Wright Corp. (CW) | 17.2% |
| CAE Inc. (CAE) | 22% |
| Embraer SA (ERJ) | 42.6% |
*Based on 12- to 18-month price targets.
TransDigm Group Inc. (TDG)
TransDigm designs and manufactures original aircraft parts sold to manufacturers. The company also produces aftermarket replacement parts sold to commercial and military aircraft operators. In recent months, TransDigm has announced several significant buyouts, including acquiring SEI Industries, Raptor Scientific, and the components and subsystems business of Communications & Power Industries. In May, the company guided for 17.5% revenue growth and 26.8% net income growth for its fiscal 2024 ending Sept. 30. Analyst Kristine Liwag says TransDigm’s primary end markets are healthy and it is a “best in breed” industrial investment. Morgan Stanley has an “overweight” rating and $1,550 price target for TDG stock, which closed at $1,339.19 on June 3.
Northrop Grumman Corp. (NOC)
Northrop Grumman is one of the world’s largest weapons and military technology producers. Liwag says the company’s major programs, including the B-21 bomber and the Sentinel nuclear missile system, coupled with booming demand for its weapons and battle management offerings will help Northrop maintain its impressive growth trajectory. She says Northrop is well positioned to pursue optimal programs that have attractive risk-reward profiles for the company, and its exposure to U.S. nuclear triad modernization could create additional value. Liwag has named Northrop Grumman her top defense stock pick. Morgan Stanley has an “overweight” rating and $579 price target for NOC stock, which closed at $449.33 on June 3.
L3Harris Technologies Inc. (LHX)
L3Harris Technologies is an aerospace and defense company focused on technology-driven mission solutions. L3Harris completed a $4.7 billion acquisition of propulsion systems and energetics company Aerojet Rocketdyne in 2023. Liwag says L3Harris’ first-quarter earnings beat and guidance hike stood out compared to defense peers. The company also seems to be generating positive results from its LHX NeXt multiyear plan to trim costs and increase operational efficiencies. Margins expanded more than 20 basis points year over year in the quarter, and Liwag is bullish on the company’s ongoing self-help opportunities. Morgan Stanley has an “overweight” rating and $275 price target for LHX stock, which closed at $225.49 on June 3.
Howmet Aerospace Inc. (HWM)
Howmet Aerospace manufactures lightweight metal products, specializing in jet engine components, titanium structural parts, aerospace fastening systems and forged wheels. The company also provides defense solutions to its military partners, such as precision machining, integrated program management and metals expertise. Liwag says Howmet’s business is performing well across the board, and a combination of higher margins, strong execution, commercial and defense aerospace growth, volume gains, capital returns, and pricing power will create significant value for investors. She says Howmet offers an excellent blend of growth and quality. Morgan Stanley has an “overweight” rating and $100 price target for HWM stock, which closed at $84.63 on June 3.
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Textron Inc. (TXT)
Textron is an aerospace and industrial conglomerate that manufactures Bell helicopters, Cessna aircraft, and other military and industrial equipment. The company’s Textron Systems segment includes its Howe & Howe advanced robotic land vehicles business; its Lycoming piston aircraft engine business; its Airborne Tactical Advantage Company training organization; and other defense, government, and aerospace technologies and services. Liwag says Textron has a sizable aviation segment backlog and a strong balance sheet that will provide opportunities for the company to aggressively return capital to shareholders. Morgan Stanley has an “overweight” rating and $95 price target for TXT stock, which closed at $87.25 on June 3.
Curtiss-Wright Corp. (CW)
Curtiss-Wright provides specialized solutions, engineered products and other services primarily to the aerospace and defense markets. The company’s defense electronics segment includes products such as commercial off-the-shelf embedded computing board-level modules, integrated subsystems, and data acquisition and flight test instrumentation equipment. Liwag says Curtiss-Wright’s primary end markets are healthy and investors may be underappreciating its commercial nuclear power opportunities given recent orders for its AP1000 and Small Modular Reactor. Liwag says AI and data center power demand is bullish for nuclear energy. Morgan Stanley has an “overweight” rating and $330 price target for CW stock, which closed at $281.61 on June 3.
CAE Inc. (CAE)
CAE provides digital immersion and training services for the defense and security, civil aviation, and health care markets. The company’s defense and security segment includes training centers and services, along with naval, air and land simulation products. Liwag says CAE’s disappointing fiscal fourth-quarter earnings numbers were dragged down by its underperforming defense segment. However, she says defense expectations are now so low that risks have been priced in, and she believes the stock is undervalued given civil business growth opportunities and strong aerospace market demand. Morgan Stanley has an “overweight” rating and 31 Canadian dollar ($22.65) price target for CAE stock, which closed at $18.56 on June 3.
Embraer SA (ERJ)
Brazil-based Embraer is one of the world’s top regional commercial aircraft manufacturers. The company also makes private planes and military aircraft, including the Tucano single-engine pilot training and light attack aircraft. Liwag says she remains bullish on Embraer’s opportunity to break into the narrowbody aircraft duopoly currently held by Airbus SE (OTC: EADSY) and Boeing Co. (BA). In fact, the Wall Street Journal recently reported Embraer is exploring opportunities to create a new aircraft to compete with the Boeing 737 MAX and the Airbus A320. Morgan Stanley has an “overweight” rating and $40 price target for ERJ stock, which closed at $28.05 on June 3.
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8 Best Defense Stocks to Buy Now originally appeared on usnews.com
Update 06/04/24: This story was previously published at an earlier date and has been updated with new information.
