This year Aerospace stands out as one of the few industry sectors with a positive return other than energy and utilities. For example, the iShares U.S. Aerospace & Defense ETF (ITA), the largest ETF by assets representing the industry, returned 15.2% over the past twelve months in contrast to the -13.6% return posted by the S&P 500 Index.
When a sector outperforms the market benchmark so dramatically in a given year, the question a manager must ask is whether the next year will see this trend continue or if the sector has become overpriced to the point that it will soon mean-revert. ValuEngine provides company, sector and ETF reports that provide analytic frameworks to explore potential answers to this and similar questions.
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Today’s analysis includes four companies in the Aerospace/Defense industry sector measured against the ETF ITA and the Vanguard S&P 500 Index ETF (VOO). Each of the four companies was chosen for specific reasons.
Axon Enterprise, Inc. (AXON): The Company develops technology and weapon products for military, law enforcement, and civilians. Its initial product and former namesake is the Taser, a line of electroshock weapons. AXON is based in Scottsdale AZ. ValuEngine rates AXON 2 out of 5 on the basis of projected price returns relative to the entire ValuEngine universe. It is a top-ten holding of ITA, the ETF we are using as the benchmark for the Sector that includes such things as systems and aerostructures; unmanned aircraft systems; electro-optic, night vision, and countermeasures systems; naval systems; land vehicle systems; munitions, cyber systems; electronic warfare and signal intelligence systems; and other commercial activities. The company markets its systems and products as a prime contractor or subcontractor to various governments and companies. It also has operations in the United States, Europe, Latin America, the Asia-Pacific, and internationally. The company was incorporated in 1966 and is based in Haifa, Israel.
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
Elbit Systems (ESLT): The Company develops and supplies a portfolio of airborne, land, naval systems and products for defense, homeland security, and commercial aviation applications primarily in Israel. Products and services include military aircraft and helicopter systems; commercial aviation systems; unmanned aircraft systems; electro-optic, night vision, countermeasures systems; naval systems; land vehicle systems; munitions, cyber systems; electronic warfare and signal intelligence systems; and other commercial activities. The company markets its systems and products as a prime contractor or subcontractor to various governments and companies. It also has operations in the United States, Europe, Latin America, the Asia-Pacific, and internationally. The company was incorporated in 1966 and is based in Haifa, Israel but has its primary stock listing in the USA on Nasdaq.
Kratos Defense & Security Solutions, Inc. (KTOS) operates as a government contractor of the U.S. Department of Defense. The company operates through two segments, Kratos Government Solutions and Unmanned Systems. The Kratos Government Solutions segment offers microwave electronic products, space and satellite communications, training and cybersecurity/ warfare, C5ISR/ modular systems, turbine technologies, and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial systems and unmanned ground and seaborne systems. It serves national security related agencies, the department of defense, classified agencies and international government agencies that include both domestic and international commercial customers. Kratos Defense & Security Solutions, Inc. was incorporated in 1994 and is headquartered in San Diego, CA.
Lockheed Martin Corporation (LMT) engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide. It operates through four segments: Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space. It primarily serves the U.S. government, as well as foreign military sales contracted through the U.S. government. It was founded in 1912 and is headquartered in Bethesda, Maryland. It is the second largest aerospace company in the USA behind Raytheon, Inc.
More insights into the two ETFs:
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
iShares U.S. Aerospace & Defense ETF (ITA) tracks a market-cap-weighted index of US-listed manufacturers, assemblers and distributors of aircraft and aircraft parts primarily used in commercial or private air transport including producers of components and equipment for the defense industry, including military aircraft, radar equipment and weapons. The fund caps its holdings to meet diversification requirements, limiting a single company to 22.5% of the fund’s assets, and preventing completely unbiased exposure to the top few that dominate the industry. Concentration risk remains high; the top five holdings comprise 55% of its portfolio. Despite this, ITA still allocates holdings to a mixture of large, mid, and small-cap companies. The fund uses a representative sampling strategy in lieu of full replication. The index is rebalanced quarterly.
Vanguard S&P 500 ETF (VOO) tracks the S&P 500, a market-cap-weighted index of US large- and mid-cap stocks selected by the S&P Committee and the dominant mutual fund and institutional benchmark in the USA. As mentioned in the past, VOO and IVV (the iShares S&P 500 ETF) are both superior alternatives for most investors for buying new shares. The combination of lower fees and a more efficient structure allowing for stock lending and dividend reinvestment improves investor net returns by an average of 0.14% (14 basis points) per annum.
The table below provides summary info for all four stocks and two ETFs. All data are as of December 4, 2022. More comprehensive analysis can be found by pulling up the underlying ValuEngine reports.
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
| AXON | ESLT | KTOS | LMT | ITA | VOO | |
| Axon Enterprise Inc. | Elbit Systems | Kratos Defense & Security | Lockheed Martin Corp. | iShares US Aerospace/Defense | Vanguard S&P 500 ETF | |
| ValuEngine Rating | 2 | 5 | 4 | 3 | 5 | 3 |
| Market Cap ($B) or AUM | 13.4 B | 7.5 B | 1.3 B | 130.0 B | 4.3 B
AUM |
270.6 B
AUM |
| VE Forecast 3-mo. Price Return | +2.82% | +3.77% | +0.55% | +3.74% | +3.75% | +2.02% |
| VE Forecast 6-Mo. Price Return | +8.79% | +2.45% | +0.28% | +6.96% | +6.40% | +5.21% |
| VE Forecast 1-yr. Price Return | -11.00% | +14.58% | +8.95% | +0.25% | +1.29% | -2.15% |
| Last mo. Price Return | +30.03% | -13.93% | -8.16% | +2.94% | +7.86% | +8.56% |
| Last 3 mo. Price Return | +63.09% | -17.41% | -18.32% | +18.55% | +13.96% | +3.76% |
| Last 6 mo. Price Return | +79.65% | -18.41% | -34.91% | +12.50% | +9.64% | -2.52% |
| Historic 1-Yr. Price Return | +18.49% | +14.89% | -52.15% | +50.13% | +15.15% | -11.07% |
| Historic 5-Yr Ann. Price Return | +40.02% | +4.49% | -1.83% | +5.97% | +3.72% | +8.15% |
| Volatility | 48.4% | 26.7% | 41.5% | 36.0% | 26.7% | 18.6% |
| Sharpe Ratio | 0.83 | 0.17 | -0.04 | 0.34 | 0.14 | 0.46 |
| Beta | 0.70 | 0.64 | 0.94 | 0.74 | 1.10 | 1.00 |
| # of Stocks | 1 | 1 | 1 | 1 | 36 | 500 |
| Undervaluation Percentile | 3 | 53 | 82 | 12 | 25* | 30* |
| P/B Ratio | 10.5 | 2.9 | 1.3 | 10.9 | 4.0 | 3.8 |
| P/E Ratio | 107.3 | 25.4 | 106.7 | 18.4 | 34.3 | 18.6 |
| P/S Ratio | 12.5 | 1.4 | 1.5 | 2.1 | 2.9 | 2.5 |
| Div. Yield | 0.0% | 1.2% | 0.0% | 2.4% | 0.9% | 1.6% |
| Expense Ratio | N/A | N/A | N/A | N/A | 0.39% | 0.03% |
* ETF Undervaluation # is the percentage of undervalued stocks, not a comparison with all other ETFs in our universe3
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Analysis
- Our prediction model’s top choice is Elbit Systems (ESLT) with a projected year-ahead gain of nearly 15%. This projection is almost identical with its trailing 12-month return, indicating continued strength. In fact, it is the only Aerospace stock rated 5 (strong buy) in our universe with a 95th percentile forecast rank. ESLT is also in the 53rd percentile for valuation of our entire stock universe, and in our top 10 for valuation in this particular industry where more than 70% of Aerospace/Defense stocks are rated as overvalued by our model. It also has a 25% higher dividend yield than ITA, the industry sector ETF.
- Kratos Defense & Security (KTOS) is rated 4 (Buy) by our forecast model. It is in the 88th percentile for projected year-ahead performance. It has the added bonus of being the most undervalued stock as ranked by our valuation model. Within the context of our entire universe, it is in the 82nd percentile for valuation. Although its price/sales and price/book ratios are well into the value range, its price-to-earnings ratio is very high. Unlike most of the other stocks in this analysis, KTOS has posted well-below average returns for the past one-year and five-year periods.
- Lockheed Martin (LMT) had been one of the largest and most representative industry stalwarts. As is often the case with large S&P 500 companies, it is rated 3 (neutral) for year-ahead performance. LMT pays by far the highest dividend of the stocks in this universe with a yield of 2.4% to accompany an impeccable balance sheet. It is not undervalued, however, by our models, residing in the 12th percentile for overall valuation. That said, its traditional metrics show it to be undervalued compared to both its industry ETF and the S&P 500. Taken together with a low Beta of 0.74, LMT is worth considering as a solid core holding for most portfolios.
- Finally, Axon Systems (AXON) is almost an inverse case of KTOS with very strong 1-month through 6-month past return numbers and a poor prognosis for future 12-month return. AXON is significantly overvalued by our model and by traditional metrics as well. Its forecast rating is 2 (Sell).
- Do not overlook ITA, the industry ETF itself. It is rated 5 and its forecast rank is higher than 96% of the more than 500 US equity ETFs in the ValuEngine universe. Although ITA is concentrated by ETF standards, it certainly provides more benefits of diversification than any individual stock. This is especially true of the disparate characteristics of the four stocks in this analysis. On the minus side, one thing ITA is not is a value play. According to traditional metrics and stock composition, both are more overvalued than the S&P 500 ETF VOO. Its dividend yield of 0.9% is less than half that of VOO. Finally, its expense ratio of 0.39% is relatively high for a passive cap-weighted industry ETF.
In summary, our models and analyses consider the aerospace/defense industry’s ETF, ITA, to be a strong candidate to continue to outperform. Using this as representative of the industry, stock pickers may find the entire industry, especially ESLT, KTOS, and LMT, as fertile ground to hunt for appropriate stocks for clients. This analytic framework is offered to investors to facilitate comparative analysis in meeting the objectives and constraints of end investors. That said, always download the fact sheet of any ETF before buying it for a client or your own portfolios.
By Herbert Blank
Senior Quantitative Analyst, ValuEngine Inc
www.ValuEngine.com
support@ValuEngine.com
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