Zacks Industry Outlook Highlights: Embraer, General Dynamics, Wesco Aircraft Holdings, Huntington Ingalls Industries and Northrop Grumman

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Apr 17, 2014, 09:30 ET

CHICAGO, April 17, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Aerospace & Defense, including Embraer S.A. (NYSE:ERJ-Free Report), General Dynamics Corp. (NYSE:GD-Free Report), Wesco Aircraft Holdings, Inc. (NYSE:WAIR-Free Report), Huntington Ingalls Industries Inc. (NYSE:HII-Free Report) and Northrop Grumman Corp. (NYSE:NOC-Free Report).

Industry: Aerospace & Defense

Link: http://www.zacks.com/commentary/32190/

The aerospace & defense sector posted an impressive performance in 2013, braving issues like sequestration, budget cuts and cancellation of big-ticket programs. In fact, in the year-end quarter, all the defense companies in our universe, except one, surpassed the Zacks Consensus Estimate.

The highest positive surprise of 85 cents was clocked by Embraer S.A. (NYSE:ERJ-Free Report) while the lowest surprise of 0.6% came from General Dynamics Corp. (NYSE:GD-Free Report). On the contrary, Wesco Aircraft Holdings, Inc. (NYSE:WAIR-Free Report) missed the Zacks Consensus Estimate by 6.9%.

The aerospace sector's earnings are expected to decline 5.1% in the first quarter of 2014 compared with 20.0% growth in the last quarter. However, the sector will likely witness 1.0% top-line growth in the to-be-reported quarter as against a 0.1% fall in the prior quarter.

For 2014 on the whole, the sector is expected to register bottom-line growth of 4.5% which will further rise to 10.5% in 2015. The top line will likely see 0.9% and 1.5% growth in 2014 and 2015, respectively.

For a detailed look at the earnings outlook for this sector and others, please see our weekly Earnings Outlook.

OPPORTUNITIES

Although the threat from sequestration remains for periods beyond fiscal 2015 and casts a shadow of uncertainty on long-term funding, we would prefer Huntington Ingalls Industries Inc. (NYSE:HII-Free Report), a Zacks Rank #1 (Strong Buy) stock, posting strong financial results and surpassing our estimates by 34.7% on an average in the last 4 quarters. This upside was driven by higher revenues from surface combatants and the Legend-class NSS program.

Since the start of 2014, there have been a number of share price gainers with General Dynamics witnessing the highest increase of around 11.5% so far buoyed by consistent contract wins and a stable fourth quarter performance. It posted a 7.5% positive surprise over the last four quarters on an average.

With approximately $2.7 billion of free cash flow exiting 2013, General Dynamics' solid financial position well cushions the dividend payout. At the end of the fourth quarter 2013, its cash and cash equivalents stood at $5.3 billion, reflecting an increase of almost 61.0% from year-end 2012.

This Zacks Rank #2 (Buy) company recently boosted its quarterly dividend by 10.7%, marking the 17th consecutive increase and bringing the annualized payout to $2.48 per share.

Among the defense top players, Northrop Grumman Corp. (NYSE:NOC-Free Report) has delivered a year-to-date return of about 2.4%, outperforming the S&P return of negative 1.4%. With a market cap of $25.29 billion, the defense major has a one-year return of 61.8%, higher than the S&P 500 return of 14.3%.

This Zacks Rank #2 (Buy) company successfully beat the Zacks Consensus Estimate on both the top and the bottom line in the fourth quarter of 2013 and has a positive earnings surprise of about 3.1% on an average over the last 4 quarters. The earnings beat was attributable to a lower share count and strong operating performance.

In a nutshell, a steady flow of contracts, which also include substantial international orders, a funded backlog of $22.5 billion as of Dec 31, 2013, the introduction of new products, and the commitment to return wealth to its shareholders make this stock attractive.

The world's third largest commercial aircraft manufacturer, Embraer SA's fourth-quarter earnings jumped 177.0% from the prior-year quarter and beat the Zacks Consensus Estimate by 70.8%. This Zacks Rank #2 (Buy) company's stellar performance was backed by strong demand for its commercial and executive jets.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

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