AAR-3 Defense Equipment Stocks to Buy Amid Supply Chain Challenges

Core Viewpoint - The Zacks Aerospace-Defense Equipment industry is poised for growth due to impressive global air passenger traffic forecasts, despite facing challenges from supply-chain disruptions that may impact demand for aircraft parts and overall profitability [1][5][6]. Industry Overview - The Zacks Aerospace-Defense Equipment industry includes companies that manufacture essential components for aerospace and defense, such as aerostructures, propulsion systems, aircraft engines, and defense electronics. These firms also provide aftermarket support services like maintenance and repair [2]. Trends Shaping the Industry - Mergers and Acquisitions: The industry is witnessing a trend of mergers and acquisitions aimed at expanding product lines and improving economies of scale. Notable acquisitions include Teledyne Technologies' purchase of Micropac Industries and HEICO Corporation's acquisition of Mid Continent Controls [3][4]. - Air Traffic Growth: The International Air Transport Association (IATA) projects an 8% growth in revenue passenger kilometers (RPKs) for 2025, with airline revenues expected to reach $1.007 trillion, a 4.4% year-over-year increase, benefiting aerospace-defense equipment stocks [5]. - **Supply-Chain Challenges**: Ongoing supply-chain disruptions are expected to continue affecting the global airline industry's profitability, with IATA estimating a 30% shortfall in 2024 aircraft deliveries and a downward revision for 2025 deliveries [6]. Industry Performance - The Aerospace-Defense Equipment industry has outperformed both the Zacks S&P 500 composite and its sector over the past year, with a collective stock surge of 37.7%, compared to 9.9% for the Aerospace sector and 24.8% for the S&P 500 [10]. - The industry currently trades at a trailing 12-month EV/Sales ratio of 7.72X, significantly higher than the S&P 500's 5.60X and the sector's 2.56X, indicating a premium valuation [12]. Notable Companies - **AAR Corp.**: Reported a 26% year-over-year increase in net sales for Q2 fiscal 2025, with a Zacks Consensus Estimate indicating a 19.5% sales improvement for fiscal 2025 [15][16]. - **Axon Enterprise**: Engaged in supplying body cameras to Loomis US, reflecting strong demand. The Zacks Consensus Estimate for 2025 sales indicates a 22.6% improvement [17][18]. - **Kratos Defense & Security Solutions**: Recently won a hypersonic system program award valued at approximately$ 100 million, contributing positively to its revenue outlook. The Zacks Consensus Estimate for 2025 sales indicates a 12.2% improvement [20][21].