Image: Bigstock

The second-quarter reporting cycle of 2024 for aerospace-defense stocks, housed within the broader Zacks Aerospace sector, has already started, with a handful of major defense contractors delivering mixed results. While companies like Lockheed Martin, Northrop Grumman, and Textron delivered better-than-expected earnings, General Dynamics lagged estimates.

A quick sneak peek at the whole picture makes us optimistic about the second-quarter sales performance of the remaining aerospace-defense stocks, with widespread geopolitical instabilities forcing nations to strengthen their defense arsenal and surging commercial air travel playing the role of a major catalyst. However, the adverse impact of persistent supply-chain disruptions might have partially hurt their earnings. 

A handful of defense stocks like Leidos Holdings (LDOS - Free Report), Curtiss-Wright Corporation (CW - Free Report), Embraer (ERJ - Free Report), and Huntington Ingalls Industries (HII - Free Report), which are set to release their second-quarter results soon, are likely to beat on earnings this reporting cycle.

Factors Driving Aerospace-Defense Stocks’ Growth in Q2

The defense budget has always played a crucial role in boosting a nation’s defense capabilities. With the United States being the world’s largest weapon manufacturer, its defense budget has always been in the spotlight and has acted as a major growth catalyst for its defense contractors. 

Notably, the U.S. administration has been enhancing its defense budget significantly to tackle the growing geopolitical instability worldwide. To this end, it is imperative to mention that the fiscal 2025 U.S. defense budget proposal includes a funding request worth $850 billion for the U.S. Department of Defense (DoD), reflecting a 1% increase over fiscal 2024’s enacted budget amount. 

Such enhanced budgetary provisions, thereby, must have prompted increased order inflows for major defense primes from the Pentagon, thereby bolstering industry players’ order book. We may expect the backlog count of major defense players to reveal this trend, once their second-quarter numbers are released.

In addition to budgetary provisions, increased spending by the U.S. administration in the form of security aids offered to hostility-affected nations like Ukraine and Israel has proved to be beneficial for the aerospace-defense stocks. Evidently, per a report by the U.S. Department of Justice, America has provided approximately $53.7 billion in military assistance since Russia launched its invasion of Ukraine in 2022, and approximately $54.4 billion in military assistance since Russia’s initial invasion of Ukraine in 2014. 

Since these security aids include the supply of military arms and ammunition made by U.S.-based defense contractors, these security packages are likely to have bolstered revenues for the aerospace-defense stocks in the second quarter.

For those aerospace-defense stocks like Embraer with a strong presence in the commercial aerospace industry, the steadily growing commercial air passenger traffic has been boosting their quarterly performance through enhanced deliveries.

Evidently, we are expected to witness a year-over-year improvement of 3.2% in revenues from Embraer’s Commercial Aviation business segment in the second quarter. Similar trends are likely to have aided the performance of other aerospace-defense stocks, which are yet to report.

However, some lingering factors like consistent supply-chain challenges have been disrupting the delivery of finished products, particularly for commercial jet makers, as evident from the decline witnessed in Boeing and Airbus’ second-quarter deliveries. This, along with high-interest expenses, might have had some adverse impact on the overall performance of the aerospace-defense stocks.

Q2 Projections

Per our latest Earnings Outlook, earnings for the Aerospace sector are expected to decline 2.3% year-over-year. However, sales are likely to improve 4%.

Zacks Methodology

Given the high degree of diversity in the defense space, finding the right stocks with the potential to beat on earnings might be quite a daunting task. However, our proprietary Zacks methodology makes it fairly simple.

We are focusing on stocks that have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy), or 3 (Hold). Our research shows that for stocks with this combination, the chances of an earnings beat are as high as 70%.

Earnings ESP provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Our Choices

Below we present four stocks that are expected to come up with an earnings beat this reporting cycle.

Leidos Holdings, Inc.

Leidos Holdings is a global science and technology leader that serves the defense, intelligence, civil, and health markets. Increased sales volumes for its multiple programs, like the Sentinel, health services business, Airborne ISR, and Hypersonics, can be expected to have bolstered the company’s second-quarter revenues. Improved program execution and disciplined cost management initiatives taken by the company are likely to have boosted its second-quarter bottom-line performance.

Leidos Holdings, with an Earnings ESP of +1.33% and a Zacks Rank #3 (Hold) at present, is set to release earnings on July 30. The Zacks Consensus Estimate for the company's second-quarter sales is pegged at $4.01 billion, indicating a 4.5% improvement from the year-ago quarter’s reported figure.

Leidos Holdings, Inc. Price and EPS Surprise

Image Source: Zacks Investment Research, Leidos Holdings, Inc. Quote

Curtiss-Wright Corporation

This company provides highly engineered products and services for high-performance platforms and critical applications in key areas, such as commercial aerospace and defense electronics, reactor coolant pumps for next-generation nuclear reactors, as well as advanced surface treatment technologies.

Increasing demand for its defense electronics products, particularly tactical communication equipment, as well as soaring demand for its commercial nuclear products, might have benefited the company's top-line performance.

Curtiss-Wright, with an Earnings ESP of +2.42% and a Zacks Rank #3 (Hold) at present, is set to release earnings on Aug. 7. The Zacks Consensus Estimate for the company's sales is pegged at $736.2 million, indicating a 4.5% improvement from the year-ago quarter’s reported figure.

Curtiss-Wright Corporation Price and EPS Surprise

Image Source: Zacks Investment Research, Curtiss-Wright Corporation Quote

Embraer S.A.

Embraer designs, manufactures, and sells aircraft and aviation-related structural parts to the world’s commercial aviation, executive aviation, and defense markets. As one of the leaders in the commercial aircraft space, the improving commercial air travels in recent times must have benefited the company's delivery figures in the second quarter, thereby bolstering its overall quarterly results.

Embraer, with an Earnings ESP of +21.55% and a Zacks Rank #3 (Hold) at present, is set to release earnings on Aug. 8. The Zacks Consensus Estimate for the company's sales is pegged at $1.40 billion, indicating an 8.7% improvement from the year-ago quarter’s reported figure.

Embraer-Empresa Brasileira de Aeronautica Price and EPS Surprise

Image Source: Zacks Investment Research, Embraer-Empresa Brasileira de Aeronautica Quote

Huntington Ingalls Industries, Inc.

Another company that’s likely to come up with an earnings beat this time around is Huntington Ingalls. It designs, builds, and maintains nuclear-powered ships, such as aircraft carriers and submarines, and non-nuclear ships, such as surface combatants, expeditionary warfare/amphibious assault, and coastal defense surface ships.

In April 2024, Huntington Ingalls delivered the Virginia-class fast-attack submarine New Jersey (SSN 796) to the U.S. Navy. This notable delivery must have aided the company’s quarterly performance.

Huntington Ingalls, with an Earnings ESP of +0.39% and a Zacks Rank #2 (Buy) at present, is set to release earnings on Aug. 1. The Zacks Consensus Estimate for the company's sales is pegged at $2.84 billion, indicating a 1.9% improvement from the year-ago quarter’s reported figure.

Huntington Ingalls Industries, Inc. Price and EPS Surprise

Image Source: Zacks Investment Research, Huntington Ingalls Industries, Inc. Quote

More By This Author: