We maintain a strong outlook on global Aerospace and Defense due to several key secular tailwinds. In the commercial aviation industry, the global economic recovery, stable commodity rates, and increasing passenger travel demand continue to drive growth. The defense industry continues to benefit from a growing U.S. defense budget and increased defense allocations from major countries in Asia and Europe. The attached deck accompanies Andrew’s webinar on Thursday, September 13 in which he will review key sector trends before highlighting A&D stocks currently on our Focus Lists as well as several stocks of interest.
Tag: Global Capital Equipment Sector
Global Capital Equipment Sector
Some highlights from the report:
Since our last Capital Equipment Sector report in December, we have added two stocks and removed 10, largely due to technical breakdowns of the stocks amidst the global market correction in late January.
The stocks added were: FLIR Systems ( FLIR ) and United Tractors ( UTR.ID ). The stocks removed were: Eagle Materials ( EXP ), Pulte Group ( PHM ), and U.S. Concrete ( USCR ) in the U.S.; Alimak Group ( ALIG.SE ), Breedon Group ( BREE.GB ), and Elbit Systems ( ESL.IL ) in EMEA; and Beijing Enterprises Water ( WANO.HK ), Bharat Electronics ( BHE.IN ), Hirata ( HIRT.JP ), and Scientex ( STEX.MY ) in APAC.
In this report, we screened for potential winning Capital Equipment stocks in the U.S., EMEA, and APAC regions.
Our top Focus List picks are: AIG.TW, FLIR, HEI, KOMN.CH, PMET.MY, and UTR.ID.
Global Capital Equipment Sector
The U.S. Aerospace and Defense segment continues to benefit from favorable global macro factors. The sector has maintained stable growth momentum over the last two months, as reflected by its Industry Group Rank which has consistently been better than 30. Long-term tailwinds boosting the sector include:
• The U.S. government’s announcement of the fiscal 2018 defense policy bill has been the key driver of the country’s defense industry. Valued at roughly $700B, the allocation is sharply higher than 2017’s budget of $619B.
• Geopolitical tensions between the U.S. and North Korea over the last few months helped contractors pull in new orders. Demand for products and services from companies catering to the U.S.’s defense needs has been strong.
• Major U.S. defense companies are also foraying into foreign markets, taking advantage of ongoing geopolitical tensions in the Middle East. The U.S. government’s involvement in the region and technological superiority has provided inroads to many Middle Eastern countries.
• Strategic acquisitions and cross-border agreements among the big aerospace and defense players are other key trends in the market. Technical specialization, increasing competition, and macro challenges within the industry are
prompting for such deals.
• Further, the commercial aviation industry has witnessed a revival recently. A strong increase in global air traffic, backed by increasing disposable income and competitive airfares, has boosted demand for aircraft production.
• Along with revenue growth, strong macro factors are reflected by the industry’s healthy margins and free cash flow generation.
Global Capital Equipment Sector
U.S.
· The Sector is improving relatively over the short term and is trading at all-time highs.
Ø Aerospace/Defense: On September 18, the U.S. Senate passed the 2018 National Defense Bill under NDAA, increasing the country’s defense budget by $80B to $700B for the next fiscal year. This allocation is a sharply higher than 2017’s $619B. Top pick is Heico). It is a bit extended but actionable as it bounces off its 50-DMA.
Ø Infrastructure and Housing: According to Moody’s Analytics, those two recent hurricanes could inflict as much as $200B damage on the private and public sectors, which is equivalent to 0.5% of the U.S. GDP. The aftermath of these hurricanes will generate massive clean-up and rebuilding operations. Top pick Pulte
) builds in both Florida and Texas. Stock is extended, but we would add on a low-volume pullback to the 50-DMA.
EMEA
· EMEA Staples sector is outperforming over long-term, but moderately weakening in short-term.
· NATO Increases Defense Expenditures: Key for Europe’s Defense Subsector Growth
· The U.K. government announced its intent to invest 1-1.2% of GDP on economic infrastructure from 2020, compared with 0.8% currently.
· Companies offering solutions to improve the flow of goods and logistics are performing well in Europe. This is especially true for ecommerce companies and existing retailers looking to expand and modernize their distribution networks, including warehouses.
Ø Aerospace/Defense Focus List: Elbit Systems (ESL.IL; ESLT:IT), Thales (CSF.FR; CSF:FP)
Ø Infrastructure Focus List: Breedon Group (BREE.GB; BREE:LN), CRH (CRH.GB; CRH:LN)
Ø Automation/Machinery Focus List: Alimak Group (ALIG.SE; ALIG:SS), IMA Industria Macchine (IMA.IT; IMA:IM), Kion Group (KGXX.DE; KGX:GR), Komax (KOMN.CH; KOMN:SW)
APAC
· The APAC Staples sector is improving in the short term but still underperforming over the long term. Still, we favor a couple key areas of growth including:
Ø Robotics: Harmonic Drive Systems (HARM.JP; 6324:JP), Hirata (HIRT.JP; 6258:JP)
Ø Defense: Bharat Electronics (BHE.IN; BHE:IN)
Ø Machinery: Airtac (AIG.TW; 1590:TT), Chroma (CMA.TW; 2360:TT), Press Metal (PMET.MY; PMAH:MK)
Ø Packaging: Scientex (STEX.MY; SCI:MK)
Ø Others: Beijing Enterprises Water Group (WANO.HK; 371:HK), Xinyi Glass (XINY.HK;868:HK)
Global Capital Equipment Sector
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Global Capital Equipment Sector
As terrorist acts increase around the world and tensions escalate between the U.S. and various rogue countries, the importance of bolstering military spending is one of the top priorities of the Trump administration. In May, Trump’s FY 2018 budget request for defense spending totaled $639B, including a base budget increase of $52.8B, or 10% more than Obama’s FY 2017 request. Defense stocks, including General Dynamics (GD), Lockheed Martin , Northrop Grumman (NOC), and Raytheon (RTN) rallied on the budget news, many of them breaking out to new highs. These stocks offer limited earnings growth in 2017, with the average in the mid-single digits, but their cash flow generation is healthy, increasing 10% on average in 2016 to support dividend yields of around 2% for each. In general, defense stocks have performed well for the year behind the expectations of higher military spending, not only in the U.S., but worldwide. According to the Stockholm International Peace Research Institute, global military spending in 2016 increased for the first time since 2011, reaching $1.7T, up 0.4% y/y.
