In a research note regarding the aerospace and defense sector, Goldman Sachs analyst Noah Poponak upgraded Leidos (LDOS) to Buy on strong free cash and Spirit AeroSystems (SPR) to Neutral on better cash generation, while cutting the firm's ratings on Embraer (ERJ) and Esterline (ESL) to Sell.

AEROSPACE, DEFENSE STOCKS DOING WELL: Goldman Sachs' Poponak pointed out in a research note to investors that the Aerospace and Defense sector has performed well this year despite market concerns on valuation in Defense and the point of the cycle in Aerospace. Additionally, the analyst noted that defense and aftermarket have been strong as end markets and he continues to favor them.

BUY LEIDOS: Poponak upgraded Leidos to Buy, with a $68 price target, as he thinks the market is underestimating revenue, earnings and especially cash flow potential in 2018 and 2019. Large programs are set to accelerate in 2018, while more IS&GS merger synergies come through, and a reversal of working capital should drive outsized free cash versus investor expectations, the analyst contended, adding that Leidos is the least expensive Defense stock he covers. Poponak highlighted that the Defense budget growth should drive accelerating revenue in both 2018 and 2019.

SPIRIT PERFORMING BETTER: Meanwhile, Goldman Sachs' Poponak also upgraded Spirit AeroSystems to Neutral from Sell and raised his price target on the shares to $68 from $54. While he acknowledged that he remains concerned with Aerospace OE medium-term, he noted that narrowbody demand has remained resilient and is 60% of the company's revenue. Further, the analyst pointed out that Spirit has performed better on margins and free cash than he had anticipated.

SELL EMBRAER, ESTERLINE: Also this morning, Poponak double-downgraded Embraer to Sell from Buy, with a $18 price target, and cut Esterline's rating also to Sell from Neutral, with a $75 price target. While Embraer implemented its cost reduction plan, margin improvement did not follow, the analyst told investors, adding that he believes margins have new headwinds going forward. Poponak pointed out that the EJet skyline has substantial holes post-2017, and regional jet demand has been weak. Moreover, he noted that challenges remain in business jet and Brazil Defense. With weak volume and pricing ahead, and the cost reduction plan already implemented, EBIT and cash flow could disappoint, the analyst contended. Regarding Esterline, Poponak told investors that its margins have been trending lower since it first implemented its operational turnaround plan several quarters ago. The analyst noted he also sees growth headwinds in Aero and the non-A&D businesses. There are signs Esterline has been losing share or price, he contends, adding that initial 2018 guidance could be well below expectations.

BAIRD UPS RAYTHEON TARGET: His peer at Baird also raised Raytheon's (RTN) price target to $212 from $170 this morning to reflect significant program wins both domestically and internationally for missile defense and missile systems that puts the company in position for favorable organic growth in 2018 and beyond. Analyst Peter Arment reiterated an Outperform rating on the shares.

WHAT'S NOTABLE: Defense stocks rallied on Wednesday, a day after President Donald Trump warned that threats from North Korea "will be met with fire and fury." However, the rest of the market fell on concerns about increased geopolitical tensions in the area. Other publicly traded companies in the sector include Lockheed Martin (LMT), Northrop Grumman (NOC) and L3 Technologies (LLL).

PRICE ACTION: In morning trading, shares of Leidos have gained almost 1% to $56.56, while Spirit's stock is fractionally down to $69.68. Embraer and Esterline are down about 4% and 2% to $20.65 and $85.70, respectively.