According to a new report published by risk intelligence company, Verisk Maplecroft, the number of conflict zones worldwide has increased by nearly two-thirds over the past three years, with wars and unrest intensifying. Ukraine, the Middle East, and parts of Africa have been the most affected regions, with no immediate end to most conflicts in sight.
On November 19, Kyiv marked 1,000 days since the Russian invasion in early 2022. The Middle East is in flames, in what is being described by defense experts as the region’s worst crisis since the Arab-Israeli War in 1973, with the battle spreading from Gaza to Lebanon in continuation of Israel’s response to the October 2023 Hamas-led attack on the country.
While the human impact of these conflicts has been tragic, aerospace companies in the defense sector have profited as demand for fighter jets and autonomous aerial vehicles surged. Several notable contractors have thrived over the last two years, with substantial gains in their share price, as countries rushed to bolster their air defense. An aerospace and defense ETF issued by iShares had gained over 20% year-to-date as of the close of day on December 6.
When the war in Ukraine broke out, industry experts anticipated that Western sanctions on Russia would impact the aerospace sector. The country was the source of around 30% of the titanium used by major engine makers to power fighter jets and commercial aviation. However, the supply of this key material from Russia has largely remained unaffected.
Additionally, the commercial aerospace sector is also showing signs of resurgence as international travel returns to pre-pandemic levels. While sharing his insights on commercial aviation at the Morningstar Investment Conference in Chicago in June, Tony Bancroft from Gabelli Funds stated that he had noticed a significant growth in aircraft orders, with two major manufacturers having a 12-year backlog of orders.
He believes three reasons are driving it. The first catalyst is China, which accounts for 20% of the growth in orders to cater to the growing middle class in both China and India, who want to travel more. The second critical factor he cited was business travel returning to the 2019 pre-pandemic level. Lastly, Bancroft highlighted the rising middle class in the United States, and the world, which is increasing air travel and contributing to the economic growth in the industry.
Methodology
We sifted through screeners to identify stocks in the aerospace and defense industry with a forward price-to-earnings ratio of under 25 as of Friday, November 29, 2024, the close of the day. From there, we selected the 11 aerospace stocks with the highest number of hedge fund investors, based on Insider Monkey’s database of over 900 prominent hedge funds as of Q3 2024. The 11 undervalued aerospace stocks to buy have been ranked in ascending order based on the number of hedge funds holding stakes in them.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A commercial jetliner, flying high against the backdrop of a dramatic sunrise.
Ducommun Incorporated (NYSE:DCO) provides manufacturing solutions to customers in the global aerospace, defense, military, space, and industrial markets. It has two segments: the Electronic Systems segment, which designs and manufactures high-reliability electronic and electromechanical products, and the Structural Systems segment, which builds contoured aerostructure components and assemblies.
Ducommun Incorporated (NYSE:DCO) sells its products and services to commercial customers and government agencies. On November 9, the company announced financial results for the third quarter of fiscal year 2024. Revenue was posted at $201.4 million, up 2.6% from last year. This was the first instance of revenue crossing the $200 million mark for the company, driven by impressive growth in commercial aerospace, military, and space sectors.
DCO’s commercial aerospace revenue grew 3% year-over-year, marking the 13th quarter of revenue growth in its commercial aerospace business. During the Q3 earnings call, CEO Steve Oswald stated that the company saw excellent growth in its A220 and A320 programs.
Military and space revenue surged 6% from last year, fueled by strong performances in its radar, electronic warfare, and missile programs. Ducommun Incorporated (NYSE:DCO)’s defense revenue has been over $100 million for the last four out of five quarters.
In April this year, Ducommun Incorporated (NYSE:DCO) was awarded two major contracts worth over $50 million for the Raytheon SPY-6 family of radar systems. These include a $25 million follow-on order for one circuit card assembly already in production and a new $25 million order for another. Later in June, Raytheon awarded the company a $12 million order for the TOW missile system.
Northrop Grumman emerged as DCO’s second-largest customer in terms of revenue in Q3, up 100% from last year to $17 million. This has raised investor confidence and resulted in a bullish sentiment around the stock, as the company looks to build scale at defense giants outside of RTX.
Wall Street analysts have a consensus Strong Buy rating for the stock, with an average share price upside potential of 10%. As of Q3 2024, 13 hedge funds tracked by Insider Monkey had investments in the company. Considering its low forward P/E ratio, DCO is among the top undervalued aerospace stocks to buy according to hedge funds.
Overall DCO ranks 11th on our list of the undervalued aerospace stocks to buy according to hedge funds. While we acknowledge the potential of DCO as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DCO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
