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 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 seven defense stocks to buy with big upside potential, according to Morgan Stanley:
| Stock | Upside potential over Oct. 1 close |
| General Dynamics Corp. (ticker: GD) | 12.9% |
| TransDigm Group Inc. (TDG) | 9.6% |
| Northrop Grumman Corp. (NOC) | 8.8% |
| Howmet Aerospace Inc. (HWM) | 13.9% |
| Curtiss-Wright Corp. (CW) | -0.8% |
| Embraer SA (ERJ) | 14.7% |
| Joby Aviation Inc. (JOBY) | 108.3% |
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 strong combat systems segment sales and marine segment sales have helped offset weakness in General Dynamics’ aerospace business. Liwag says the company has a strong balance sheet and opportunities for strong earnings growth and sizable capital return upside. Morgan Stanley has an “overweight” rating and $345 price target for GD stock, which closed at $305.33 on Oct. 1.
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 the past year, TransDigm has announced several significant buyouts, including acquiring 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 is generating impressive growth and margins upside, and recent acquisitions will serve as additional revenue sources. Morgan Stanley has an “overweight” rating and $1,575 price target for TDG stock, which closed at $1,435.96 on Oct. 1.
Northrop Grumman Corp. (NOC)
Northrop Grumman is one of the world’s largest weapons and military technology producers. Liwag says Northrop has eliminated uncertainties such as the potential profitability of the B-21 program, which has previously weighed on the stock. With these overhangs gone, she says investors will shift their focus to the strength and resilience of the company’s business, including its exposure to U.S. nuclear triad investments. In addition, Liwag says Northrop is positioned to grow free cash flow by around 18% annually through at least 2026. Morgan Stanley has an “overweight” rating and $592 price target for NOC stock, which closed at $543.88 on Oct. 1.
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 with a reputation for on-time delivery, which is helping the company gain market share from competitors. As defense and commercial aerospace volumes grow, Liwag says Howmet can expand margins further and increase capital returns for shareholders. Morgan Stanley has an “overweight” rating and $115 price target for HWM stock, which closed at $100.92.
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 is an excellent investment given the company’s attractive end markets and exposure to a potential nuclear energy renaissance. Curtiss-Wright is generating record margins, and Liwag is bullish on sales of the company’s AP1000, as well as potential small modular reactor development in the future. Morgan Stanley has an “overweight” rating and $334 price target for CW stock, which closed at $336.91 on Oct. 1.
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 is her top aerospace stock pick. It has a compelling long-term outlook and is generating impressive growth numbers during its “harvest period” following years of investment. Additional aircraft orders will be a potential bullish catalyst, and Liwag says the launch of a model to compete with Boeing Co. (BA) and Airbus SE (OTC: EADSY) could be huge. Morgan Stanley has an “overweight” rating and $40 price target for ERJ stock, which closed at $34.85 on Oct. 1.
Joby Aviation Inc. (JOBY)
Joby Aviation is a California-based company developing electric vertical take-off and landing (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. It plans to deliver another aircraft to Edwards by the end of the year and two additional aircraft to MacDill Air Force Base in Florida in 2025. Liwag says Joby is an excellent investment as the company continues to progress toward the launch of a commercial service in 2025. Morgan Stanley has an “overweight” rating and $10 price target for JOBY stock, which closed at $4.80 on Oct. 1.
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7 Best Defense Stocks to Buy Now originally appeared on usnews.com
Update 10/02/24: This story was previously published at an earlier date and has been updated with new information.
