What are we looking for?
Fundamentally sound mid- and large-cap aerospace and defence companies that are trading in the United States and Canada.
The screen
Driven primarily by weak oil prices and increased geopolitical risk from the Middle East and Russia, the S&P aerospace and defence industry index has outperformed the S&P 500 on a one-year, three-year, five-year and 10-year total return basis.
The screen begins by identifying aerospace and defence companies with a market capitalization over $1-billion (U.S.).
From here, I ranked companies based on four factors:
- expected return on invested capital, which gauges how efficiently the company is using its capital to generate profits (brokers’ mean estimate);
- dividend yield;
- average year-over-year earnings-per-share growth in the past five years;
- expected free cash flow per share, which indicates on a per-share basis the amount of cash the company is expected to generate during the current fiscal year (brokers’ mean estimate) after maintaining or expanding its asset base.
These four factors are equally weighted; therefore the top 15 companies will be determined by those that have the best ranking combinations of all four factors.
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What did we find?
The results identified the top 15 companies in the United States and Canada that meet the screen criteria.
Boeing Co. tops the list as one of the largest manufacturers of commercial airplanes. With an average growth rate in EPS of more than 38 per cent in the past five years, the company continues to benefit from growth in deliveries from increased demand due to lower fuel prices and increased demand for air travel.
Lockheed Martin Corp., a global security and aerospace company, ranks second on the list. This company's revenue is significantly tied to the U.S. government and specifically the Department of Defense and Department of Homeland Security spending. U.S. government budget cuts could weigh on the company's revenue, however. Recent Lockheed announcements of restructuring include cutting overhead by 30 per cent and spinning off its information technology and services businesses worth about $6-billion (U.S.).
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Patrick Gattuso, CFA, works in the financial and risk unit of Thomson Reuters and specializes in asset management.