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 conflicts between Israel, Hamas and Iran may force the U.S. and other governments to increase defense budgets 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 seven defense stocks to buy with big upside potential, according to Morgan Stanley:
| Stock | Implied upside over Sept. 3 close* |
| General Dynamics Corp. (ticker: GD) | 16.9% |
| Northrop Grumman Corp. (NOC) | 13.2% |
| TransDigm Group Inc. (TDG) | 18.1% |
| Howmet Aerospace Inc. (HWM) | 23.6% |
| Curtiss-Wright Corp. (CW) | 10.2% |
| Embraer SA (ERJ) | 21.9% |
| Joby Aviation Inc. (JOBY) | 103.2% |
*Based on 12- to 18-month price targets from Morgan Stanley.
General Dynamics Corp. (GD)
General Dynamics is a diversified aerospace and defense company that produces a wide range of products, including Gulfstream jets, Abrams tanks and nuclear submarines. In 2023, 72% of the company’s revenue came from the U.S. government, according to Statista. Analyst Kristine Liwag says General Dynamics has a pristine balance sheet and significant capital return upside. Liwag says demand for ammunition, ground vehicles and other defense products is strong and should drive earnings growth. A refreshed lineup of Gulfstream aircraft is also bullish. Morgan Stanley has an “overweight” rating and $345 price target for GD stock, which closed at $294.92 on Sept. 3.
Northrop Grumman Corp. (NOC)
Northrop Grumman is one of the world’s largest weapons and military technology producers. Liwag says overhangs such as profitability concerns surrounding the B-21 program and the uncertain future of the Sentinel program have been lifted in recent months. She says investors are now free to shift their attention to the strength and resilience of Northrop’s product portfolio, particularly its exposure to U.S. nuclear triad investments. Liwag estimates Northrop will grow its free cash flow by a peer-leading 18% annually through at least 2026. Morgan Stanley has an “overweight” rating and $592 price target or NOC stock, which closed at $522.69 on Sept. 3.
TransDigm Group Inc. (TDG)
TransDigm designs and makes 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 completed several significant buyouts, including SEI Industries, Raptor Scientific, and the components and subsystems business of Communications & Power Industries. In August, the company guided for 20% revenue growth and 27.4% net income growth this year. Liwag says TransDigm has consistently outperformed expectations for both growth and margins, and its acquisitions create upside potential. Morgan Stanley has an “overweight” rating and $1,575 price target for TDG stock, which closed at $1,332.49 on Sept. 3.
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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 on-time delivery and high-quality products are helping it gain market share from competitors. As commercial and defense aerospace volumes grow, Liwag says Howmet has opportunities for further margin expansion. She says Howmet has potential to increase capital returns as well. Morgan Stanley has an “overweight” rating and $115 price target for HWM stock, which closed at $93.02 on Sept. 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 recent earnings beat and guidance hike were impressive, and its restructuring initiatives have positioned the company for growth in coming years. She says the company’s nuclear opportunities, including AP1000 reactor sales and small modular reactor development, are not yet fully priced into the stock. Morgan Stanley has an “overweight” rating and $334 price target for CW stock, which closed at $302.97 on Sept. 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 Embraer’s second-quarter earnings beat was driven by better-than-expected operating margins in the executive aviation and services segment, and impressive sales growth in the defense segment. In the third quarter, the company expects a resolution to the arbitration proceedings regarding Embraer’s failed merger with Boeing Co. (BA), a potential near-term bullish catalyst. Morgan Stanley has an “overweight” rating and $40 price target for ERJ stock, which closed at $32.81 on Sept. 3.
Joby Aviation Inc. (JOBY)
Joby Aviation is a California-based company developing electric vertical take-off and landing, or eVTOL, aircraft. The company has a $131 million contract with the Department of Defense. In September 2023, Joby delivered its first aircraft to Edwards Air Force Base in California. It plans to deliver another aircraft to Edwards by the end of 2024 and two additional aircraft to MacDill Air Force Base in Florida in 2025. Liwag says Joby has executed better than peers, and she is excited about its initial entry into service and commercial operations starting in 2025. Morgan Stanley has an “overweight” rating and $10 price target for JOBY stock, which closed at $4.92 on Sept. 3.
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7 Best Defense Stocks to Buy Now originally appeared on usnews.com
Update 09/04/24: This story was previously published at an earlier date and has been updated with new information.
