These Two US Defence Giants Are Currently Undervalued

What
Are
Aerospace
and
Defense
Stocks?

The
aerospace
and
defense
industry
is
made
of
industrials
companies
that
manufacture
aerospace
and
defense
products,
including
aircraft
and
aircraft
parts,
tanks,
guided
missiles,
space
vehicles,
ships
and
marine
equipment,
and
other
aerospace
and
defense
components
and
systems,
as
well
as
companies
supporting
these
products
through
repair
and
maintenance
services.

Notable
firms
within
the
Morningstar
Aerospace
and
Defense
Index
include
Boeing
[BA],
and
General
Dynamics
[GD].

High-Quality
Undervalued
Stocks

For
this
screen,
we
looked
for
the
most
undervalued
stocks
in
the
Aerospace
&
Defense
Index
with
a Morningstar
Rating of
4
or
5
stars.
Next,
we
filtered
that
list
for
stocks
that
have
also
earned
a Morningstar
Economic
Moat
Rating of
wide
or
narrow,
meaning
they
have
durable
competitive
advantages
that
are
expected
to
last
at
least
10
to
20
years.
Stocks
with
moats
and
low
valuations historically
tend
to
outperform
over
the
long
term.
As
of
September
12,
2023,
two
stocks
met
this
criteria.

Here
are
the
two
undervalued
aerospace
and
defensive
stocks
that
made
our
list:
RTX
[RTX],
and
L3Harris
Technologies
[LHX].

RTX
is
trading
at
a
31%
discount
to
its
analyst-assessed
fair
value
estimate
while
L3Harris
Technologies
is
trading
at
a
26%
discount.

Fair
Value
Estimate:
$112.00

“RTX
is
a
diversified
aerospace
and
defense
industrial
company
formed
from
the
merger
of
United
Technologies
and
Raytheon,
with
roughly
equal
exposure
as
a
supplier
to
commercial
aerospace
manufacturers
and
to
the
defense
market.
The
company
operates
in
three
segments:
Collins
Aerospace,
a
diversified
aerospace
supplier;
Pratt
&
Whitney,
an
aircraft
engine
manufacturer;
and
Raytheon,
a
defense
prime
contractor
providing
a
mix
of
missiles,
missile
defense
systems,
sensors,
hardware,
and
communications
technology
to
the
military.

“In
commercial
aerospace,
Collins
is
one
of
the
largest
aircraft
component
and
systems
suppliers.
We
think
its
substantial
scale
gives
it
negotiating
leverage
with
aircraft
manufacturers,
as
it
provides
many
systems
and
can
selectively
bid
on
critical
components.
Meanwhile,
Pratt
&
Whitney
is
in
the
early
innings
of
a
long
ramp-up
of
delivering
thousands
of
jet
engines,
which
power
some
of
the
popular
Airbus
A320neo
and
all
A220
aircraft.
Pratt
continues
to
service
older
V2500
engines
that
power
many
A320s
in
service
today.
We
see
long-term
tailwinds
for
the
GTF
as
we
believe
the
A320
family
will
be
the
dominant
narrow-body
aircraft
of
this
generation.

“In
defense,
Raytheon
provides
missiles,
missile
defense
systems,
sensors,
and
secure
communications
almost
exclusively
to
government
agencies.
We
expect
the
military’s
increased
focus
on
modernizing
its
capabilities
to
drive
material
investment
in
each
of
these
areas.
We
expect
a
flattening,
rather
than
declining,
budgetary
environment
as
heightened
geopolitical
tensions
are
likely
to
buoy
spending
despite
the
potential
debt
burden.
For
these
reasons,
in
addition
to
existing
backlogs,
we
think
Raytheon’s
businesses
can
continue
growing
despite
a
potentially
slower
overall
macro
environment.”

Nicolas
Owens,
equity
analyst,
Morningstar

L3Harris
Technologies
[LHX]

Fair
Value
Estimate:
$227.00

“L3Harris
Technologies
provides
products
for
the
command,
control,
communications,
computers,
intelligence,
surveillance,
and
reconnaissance,
or
C4ISR,
market.
The
firm
produces
uncrewed
aerial
vehicles,
sensors,
and
avionics,
as
well
as
provides
military
and
commercial
training
services
and
maintains
the
Federal
Aviation
Administration’s
communications
infrastructure.
In
July
2023,
the
company
acquired
Aerojet
Rocketdyne,
a
key
supplier
of
rocket
motors
to
the
space
and
defense
industry.

“L3Harris
Technologies
is
the
sixth-largest
US
defense
contractor
by
sales
(13th
globally,
according
to
the
Stockholm
International
Peace
Research
Institute).
It
formed
in
2019
from
the
merger
of
L-3
Technologies,
a
sensor
maker
that
operated
a
decentralised
business
focused
on
inorganic
growth,
and
the
Harris
Corporation,
a
sensor
and
radio
manufacturer
that
ran
a
more
unified
business.
Underpinning
the
merger
was
an
assumption
that
additional
scale
would
primarily
generate
cost
synergies
and
eventually,
the
firms
could
produce
meaningful
revenue
synergies.

“With
the
recent
addition
of
ViaSat’s
tactical
data
link
business
and
most
recently
the
acquisition
of
Aerojet
Rocketdyne,
L3Harris
has
opportunistically
vaulted
its
strategy
forward
into
becoming
a
more
well-rounded
defense
prime
contractor,
adding
munitions,
space
exploration,
and
hypersonic
missile
components
and
capabilities
to
its
very
radio-
and
communications-heavy
base.”

Nicolas
Owens,
equity
analyst,
Morningstar

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