The fiscal 2025 National Defense Authorization Act calls for $923.3 billion in U.S. military spending, up 4.1% from 2024 levels. However, the ongoing war in Ukraine, tensions between China and Taiwan, and conflicts between Israel, Iran and Hamas in the Middle East may force the U.S. government to increase defense industry investment in coming years, 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 Aug. 2 close* |
| TransDigm Group Inc. (ticker: TDG) | 27.9% |
| Northrop Grumman Corp. (NOC) | 17.1% |
| L3Harris Technologies Inc. (LHX) | 19.5% |
| Howmet Aerospace Inc. (HWM) | 27.6% |
| Textron Inc. (TXT) | 8.9% |
| Curtiss-Wright Corp. (CW) | 19.6% |
| Embraer SA (ERJ) | 45.0% |
| CAE Inc. (CAE) | 34.9% |
*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 this year. Analyst Kristine Liwag says TransDigm has an impressive business model, a strong culture and a top-tier management team. Morgan Stanley has an “overweight” rating and $1,550 price target for TDG stock, which closed at $1,212.27 on Aug. 2.
Northrop Grumman Corp. (NOC)
Northrop Grumman is one of the world’s largest weapons and military technology producers. Liwag says Northrop’s recent second-quarter earnings beat was driven by solid revenue growth and better-than-expected margins in the company’s aeronautics segment, as well as a margins beat in its defense systems segment. Northrop also raised its full-year sales guidance to $41.4 billion, up from its previous forecast of $40.8 billion to $41.2 billion. While the stock trades at a valuation premium to its defense peers, Liwag says the premium is warranted given Northrop’s portfolio position, growth outlook and high earnings visibility. Morgan Stanley has an “overweight” rating and $579 price target for NOC stock, which closed at $494.55 on Aug. 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’ second-quarter earnings beat was driven by the company’s integrated mission systems business. The company also exceeded Liwag’s expectations on net income, operating cash flow and operating margin. Communication systems generated segment operating margins of 24.4%, boosting overall margins. In addition, L3Harris raised its full-year guidance for sales, segment operating margin and EPS. Morgan Stanley has an “overweight” rating and $275 price target for LHX stock, which closed at $230.19 on Aug. 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 says Howmet is a high-quality aerospace supplier that is winning incremental market share from competitors thanks to its reputation for quality products and its on-time delivery. She says the company has opportunities to expand margins as commercial aerospace and defense aerospace volumes grow. Morgan Stanley has an “overweight” rating and $115 price target for HWM stock, which closed at $90.16 on Aug. 2.
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 systems segment includes its Howe & Howe advanced robotic land vehicles business, its Lycoming piston aircraft engine business, its Airborne Tactical Advantage Co. tactical airborne training organization, and other defense, government and aerospace technologies and services. Liwag says Textron’s aviation segment margins exceeded expectations in the second quarter, and the company’s aviation book-to-bill ratio of about 1.1 remains strong. Morgan Stanley has an “overweight” rating and $95 price target for TXT stock, which closed at $87.23 on Aug. 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. Liwag says investors don’t fully appreciate the bull case for commercial nuclear power. She says core end market demand is strong and Curtiss-Wright has an impressive track record of execution. The company has a healthy balance sheet, and its diversified business model provides optionality. Morgan Stanley has an “overweight” rating and $330 price target for CW stock, which closed at $275.98 on Aug. 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 says commercial aircraft orders, C-390 Millennium orders, news related to the arbitration regarding Embraer’s failed merger with Boeing Co. (BA) and the announcement of a new aircraft program could all be bullish catalysts for Embraer’s stock. After years of heavy investments, Liwag says Embraer is positioned to thrive in the next aerospace upcycle. Morgan Stanley has an “overweight” rating and $40 price target for ERJ stock, which closed at $27.58 on Aug. 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’s defense business has been struggling, but a re-baselining of expectations could cap downside risk as long as the company doesn’t make any major execution missteps. She says CAE’s civil business will continue to benefit from strong aerospace demand. Liwag sees additional opportunities for buybacks as well. Morgan Stanley has an “overweight” rating and a CA$31 Canadian dollar ($22.42) price target for CAE stock, which closed at $16.62 on Aug. 2.
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8 Best Defense Stocks to Buy Now originally appeared on usnews.com
Update 08/05/24: This story was previously published at an earlier date and has been updated with new information.
