The fiscal 2025 National Defense Authorization Act calls for $923.3 billion in U.S. military spending, up 4.1% from 2024 levels. The ongoing war in Ukraine, tensions between China and Taiwan, and escalating conflicts between Israel, Hamas, Iran and Hezbollah may force the U.S. government to increase defense industry spending 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 July 2 close* |
| TransDigm Group Inc. (ticker: TDG) | 21.3% |
| Northrop Grumman Corp. (NOC) | 32.4% |
| L3Harris Technologies Inc. (LHX) | 22.9% |
| Howmet Aerospace Inc. (HWM) | 28.1% |
| Textron Inc. (TXT) | 10.7% |
| Curtiss-Wright Corp. (CW) | 21.5% |
| Embraer SA (ERJ) | 54.4% |
| CAE Inc. (CAE) | 21.5% |
*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 is a “best in breed” industrial stock with impressive margins and growing markets. Morgan Stanley has an “overweight” rating and $1,550 price target for TDG stock, which closed at $1,278.10 on July 2.
Northrop Grumman Corp. (NOC)
Northrop Grumman is one of the world’s largest weapons and military technology producers. Liwag says Northrop’s major programs, including the B-21 bomber and the Sentinel nuclear missile system, position the company to continue to outgrow many of its defense contractor peers in coming years. She says global unrest has increased demand for Northrop’s battle management and weapons offerings. In addition, Liwag says major U.S. nuclear overhaul investments will serve as a tailwind for Northrop, which also has a sizable $36 billion Space Systems backlog. Morgan Stanley has an “overweight” rating and $579 price target for NOC stock, which closed at $437.37 on July 2.
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’ 2024 guidance hike for revenue, margin and earnings per share following its first-quarter earnings beat stood out relative to peers. She says the company’s accelerating company-wide operational improvement efforts are helping expand margins. Looking ahead, Liwag says L3Harris will likely continue to look for opportunities to deleverage its balance sheet and streamline its portfolio. Morgan Stanley has an “overweight” rating and $275 price target for LHX stock, which closed at $223.60 on July 2.
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 recently hosted Howmet’s CEO and management team for an investment meeting. She says she is convinced the company remains a high-quality aerospace supplier and major beneficiary from a strong commercial aircraft aftermarket. Liwag says Howmet will likely continue to deleverage its balance sheet throughout 2024. Morgan Stanley has an “overweight” rating and $100 price target for HWM stock, which closed at $78.07 on July 2.
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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 tactical airborne training organization; and other defense, government, and aerospace technologies and services. Liwag says Textron’s $7.3 billion aviation backlog is impressive, and its balance sheet is strong. She says the company’s cash flow provides opportunities for aggressive share buybacks. Morgan Stanley has an “overweight” rating and $95 price target for TXT stock, which closed at $85.78 on July 2.
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. Following Curtiss-Wright’s recent investor day, Liwag says the company’s three-year financial targets are achievable, and its commercial nuclear opportunities may not be fully priced into the stock. She projects European orders for its AP1000 reactor could be worth about $4 per share over the next decade. Morgan Stanley has an “overweight” rating and $330 price target for CW stock, which closed at $271.65 on July 2.
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 recently hosted a meeting with Embraer’s CEO and management team and says the company is positioned to benefit from the current aerospace market cycle. She says Embraer is her top overall aerospace stock pick. The company has received 110 aircraft orders in 2024, and Liwag says incremental orders could be a bullish catalyst. Morgan Stanley has an “overweight” rating and $40 price target for ERJ stock, which closed at $25.90 on July 2.
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, as well as naval, air and land simulation products. Liwag says CAE is facing ongoing challenges in its Defense segment, and uncertainty surrounding the defense business has likely weighed on the stock. However, she says market expectations are low at this point, limiting downside risk. Liwag says CAE’s Civil segment will continue to grow given the demand backdrop. Morgan Stanley has an “overweight” rating and 31 Canadian dollar ($22.75) price target for CAE stock, which closed at $18.73 on July 2.
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8 Best Defense Stocks to Buy Now originally appeared on usnews.com
