Smaller names in the defense and aerospace industry like Precision Castparts Corp. (PCP), TransDigm Group (TDG), LMI Aerospace (LMIA), Triumph Group (TGI) and Hexcel Corp. (HXL) may beat earnings estimates on the commercial side, providing investors with better value than larger caps like Boeing (BA), says Kenneth Herbert, Senior Vice President of Equity Research at Wedbush Securities.
“At the top of my list, from an execution standpoint, I put companies like Precision Castparts, TransDigm, LMI Aerospace, Triumph Group and Hexcel. These are all suppliers to the industry that, in my opinion, from an execution standpoint, are in a very good position to continue to beat expectations and drive better margins,” he said.
Herbert also says PCP and TDG are on the top of his list for better earnings through acquisitions, and expects these names to surprise on the upside. He says the industry has not seen much multiple expansion, and earnings growth above expectations is what will drive stocks on the upside.
“In the sector right now, you need to be owning companies that are going to be able to beat earnings estimates either though better execution or through acquisitions and a robust acquisition pipeline. And I am talking more about the commercial side. Don’t get confused about acquisitions on the defense side,” Herbert said.
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