By Peter Ashton
Friday, April 13th, 2018
In The Globe and Mail, Peter Ashton uses Strategy Builder to find U.S. aerospace and defense stocks with attractive earnings growth and valuations.
The past four weeks have seen tremendous volatility in U.S. markets as the impact of the Trump administration’s trade policies are digested by investors. Recent trade actions against China have sent the S&P 500 lower by 1.5 per cent or more on a daily basis five times in the past three weeks. One of the hardest hit industries has been aerospace and defence, which is very dependent on ex-ports. The biggest individual stock component is Boeing (at 10.5 per cent), which is down more than 6 per cent in the past month. With the trade outlook now improving, many stocks in this industry may now find themselves attractively valued.
The Screen
We will be using Trading Central Strategy Builder to search for U.S. aerospace and defence stocks that have reasonable valuations combined with strong earnings-growth characteristics.
We begin by setting a mini-mum market-capitalization threshold of US$10-billion. This will focus our search on large-cap U.S. aerospace and defense stocks whose revenue streams tend to be more predictable than their smaller-cap cousins. We will also limit our search to stocks displaying forward price-to-earnings ratios of 30 or less.
Finally, to select stocks with strong earnings-growth characteristics, we screen based on projected earnings growth this year of 10 per cent or more. We will also screen for companies with five-year projected annual earnings growth rates of 5 per cent or better. Projections are made based on a consensus of industry analyst estimates.
What did we find?
The lowest forward P/E ratio be-longs to Rockwell Collins Inc., a leader in defence avionics and technology. Rockwell has a forward P/E of 19 and five-year projected earnings-per-share (EPS) growth of 11 per cent annually. Rockwell is in the process of being acquired by United Technologies with the sale expected to close in the third quarter of 2018.
Aerospace components manufacturer TransDigm Group Inc. has had a very good run over the past year with the stock price up over 30 per cent in the past 12 months. The stock has also bucked the downward trend in its industry over the past month and has put in a very respectable 5.6-per-cent gain.
The largest company on our list is aerospace giant Lockheed Martin Corp. with a market cap of US$97-billion. The stock has had a very volatile month with numerous trading days up or down more than 2 per cent. Overall, the stock is down 0.3 per cent over the past four weeks. The company has strong projected earnings growth with EPS expected to increase by 16.2 per cent this year.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.
