3 Aerospace Companies to Buy
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The U.S. is the world's largest aerospace and defense market. But recently, there was a cut in the military budget from $531 billion last year to $525 billion this year. The decline in the budget has reduced the backlogs of various aerospace and defense companies. Hence, some companies have planned new and enhanced products to maintain market share. Here are 3 that are particularly interesting.
Textron's (NYSE: TXT) subsidiary, Bell Helicopter, accounts for 35% of total revenue. Under the Bell and Boeing partnership, it has produced an aircraft called the V-22 Osprey tilt-rotor. This aircraft can fly like a plane and land like a helicopter. Recently, the U.S. Navy announced it's planning to enter a five year contract to purchase 99 units of the V-22, valued at $6.5 billion. The Marines will receive 92 aircraft, and seven will go to the Air Force.
V-22 Osprey tilt-rotor
Source: Military Today
Currently, Bell is facing a decline of $386 million in its backlog due to the military budget cuts. So it's not surprising to see revenue decline 4.5% in the first quarter. To help make up for it, Bell signed an $85 million contract in May with the U.S. Department of Defense. Under this agreement it will provide engineering and support assistance to America’s allies. Specifically, Bell will service 30 helicopters in Iraq as well as the development of a military helicopter factory in Taiwan.
Also, Bell has expanded its footprint in other countries like Brazil, China, India, and Canada. With increasing orders and expansion, Textron should be able to achieve higher revenue in upcoming years.
General Dynamics (NYSE: GD) launched its G650, a technologically advanced business aircraft, under the Gulfstream G650 program. Gulfstream is a wholly-owned subsidiary of General Dynamics. The G650 has high speed of 704 miles per hour, advanced safety features, and a large cabin. The large cabin can accommodate 18 passengers and four crew members.
General Dynamics has a backlog of around 200 G650 aircraft, with a price of $65 million per aircraft, amounting to a total value of $13 billion. The company plans to supply 28 aircraft in 2013, 40 aircraft in 2014, and 45 aircraft in 2015. It's expected that the sale of G650s will grow 16%, to $8 billion, this year.
But its combat systems segment declined 19% year over year to $1.55 billion. This is because the company had to clear backlogs for several international orders. Overall, General Dynamics reported a decline in its total backlog from $55.2 billion in the first quarter 2012 to $48.5 billion in the most recent quarter. But because of new technology, more good times lie ahead.
Northrop Grumman (NYSE: NOC) aerospace systems segment was up 4% in the first quarter. This increase was due to its F-35 program, which enjoyed higher delivery volume of its 10 major composite parts. The F-35 program produces composite parts for the jet. Under it, Northrup Grunman has designed and produced the aircraft's center fuselage, radar, and other key avionics. It earned $500 million in sales last year because of the F-35 program.
Northrop is a main supplier of Lockheed Martin (NYSE: LMT), a company that designs and produces F-35 aircraft. Lockheed is expecting to deliver 100 F-35 units Australia, which is one of the eight international associates of the F-35, starting in 2014. Additionally, the Pentagon has plans to purchase an additional 29 units this year.
With the reduced defense budget, Northrop Grunman is facing a 3% fall in its backlog to $39.4 billion. To gain investor confidence, it plans to use free cash flow of $3.2 billion to repurchase shares through 2015. Recently it's total outstanding share count was around 235 million. Its board granted approval to buy back $5 billion of stock. In the first quarter of 2013, it repurchased 6.5 million shares at an average price of $70.15 per share.
With an increased number of contracts, Bell has become a key cog in the growth of Textron. Not only is General Dynamics growing the number of its advanced aircraft, but also the demand for those aircraft's. Demand is also the driving force behind growth of the F-35. That, along with a solid repurchase plan, makes Northrup Grunman a strong buy. In fact, all of these companies would make solid additions to a portfolio.
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Madhu Dube has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics, Lockheed Martin, Northrop Grumman, and Textron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!