Zacks Industry Outlook Highlights: Spirit AeroSystem and Teledyne Technology

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Dec 19, 2014, 09:30 ET

CHICAGO, Dec. 19, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Aerospace & Defense, including Spirit AeroSystem (NYSE:SPR-Free Report) and Teledyne Technology (NYSE:TDY-Free Report).

Industry: Aerospace & Defense

Link: http://www.zacks.com/commentary/36188/rebounding-us-economy-to-breathe-new-life-into-defense

The aerospace & defense industry has been a keystone of the U.S. economy for decades having contributed significantly to it. The importance of the industry stems from the strategic role it plays in the country's security.

The U.S. is on an impressive growth trajectory with the economy showing its strongest two consecutive quarters of growth in more than a decade. The economy expanded at a solid clip of 3.9% annually in the third quarter, up from the initial estimate of 3.5%.

This was preceded by 4.6% growth in the second quarter. The third quarter was buoyed by a surge in military spending along with a drop in imports. This shows that the U.S. economy is on a relatively solid footing even as concerns build up about a global slowdown.

Government spending provided a boost to the third quarter GDP. The 16% growth in defense outlay has been the fastest in five years triggered by increasing spending on ammunition and jet fuel.

And yet there is no denying that the aerospace and defense sector is up against an apathetic market, as military budgets remain under pressure in the U.S. due to sequestration. Nonetheless, the industry has emerged relatively unscathed due to fleet renewals at airlines worldwide with more fuel efficient aircraft, a growing international market for the F-35 Joint Strike Fighter and increasing application of unmanned aircraft in warfare today.

Further, the resignation of U.S. Defense Secretary Chuck Hagel and rising threat from the Islamic State ("IS") in Iraq and Syria might see an increase in U.S. defense expenditure (read: Defense Stocks in Focus Following Hagel's Exit Amid Crisis). The Republican win in the mid-term election could spur higher defense spending, as they've historically been fierce critics of defense budget cuts.

Budget Update

On Dec 16, 2014, President Obama signed the $1.1 trillion spending bill into law to fund most of the government through the end of Sep 2015. The bill gives Pentagon $554 billion for fiscal 2015. This compares unfavorably with $572 billion enacted in fiscal 2014.

The new bill includes $490 billion for the Pentagon's base appropriation and another $64 billion for Overseas Contingency Operations ("OCO") funding. OCO is essentially government-speak for foreign wars and war on terror operations.

Zacks Industry Rank

The Zacks Industry Rank relies on the same estimate revisions methodology that drives the Zacks Rank for stocks. The way to look at the complete list of 260+ industries is that the outlook for the top one-third of the list (Zacks Industry Rank of #88 and lower) is positive, the middle 1/3rd or industries with Zacks Industry Rank between #89 and #176 is neutral while the outlook for the bottom one-third (Zacks Industry Rank #177 and higher) is negative. To learn more visit: About Zacks Industry Rank. http://www.zacks.com/stocks/industry-rank

The aerospace industry is one of the 16 broad Zacks sectors within the Zacks Industry classification. Within the Zacks Industry classification, aerospace is further sub-divided into three industries at the expanded level: aerospace/defense, aerospace/defense equipment and electric-military.

The Zacks Industry Rank for aerospace/defense is at #114 out of 260 industries, which puts it in a neutral zone. Aerospace/defense equipment with a Zacks Industry Rank #191 comes in the bottom one-third of all Zacks industries. Electric-military is also bearish, with a Zacks Industry Rank #215. There are only two stocks from the entire sector -- Spirit AeroSystem (NYSE:SPR-Free Report) and Teledyne Technology (NYSE:TDY-Free Report) -- which currently have Zacks Rank #1 (Strong Buy).

Hence, the general outlook for the aerospace sector is on the whole neutral. Investors should, however, be a little wary of the electric-military sub-industry.

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