Fortune discussed the best aviation stocks in early June, suggesting that even though they’re a bargain, they might not be worth the turbulence.
I don’t think there’s any question Boeing (NYSE:BA) stock has taken it on the chin in 2024. It’s down more than 27% with a half-year left to plummet some more. Is it a bargain?
“Nicolas Owens, an industrials equities analyst at Morningstar, notes that the spectacular nature of aviation mishaps can produce overreaction on the part of investors,” Fortune contributor Jeff John Roberts wrote on June 3.
The iShares U.S. Aerospace & Defense ETF (BATS:ITA), which has Boeing as its second-highest weighted stock holding at 14.14%, is actually up more than 7% in 2024, which suggests you might be better off buying ITA to capture the undervaluation in aviation stocks.
However, this is an article about stocks, so stocks it will be.
The ITA’s average price-to-book and price-to-earnings ratios are 3.85x and 31.61x, respectively. I will look for names held by ITA that have a product of less than 122.
Textron (TXT)
According to Morningstar.com, Textron (NYSE:TXT) has a P/E and P/S of 14.86x and 1.23x, respectively. It is the eighth-largest holding of ITA with a 4.03% weighting. Its shares are up over 6% year-to-date.
Textron isn’t a direct competitor to Boeing like GE Aerospace (NYSE:GE) but it does have several aviation-based businesses including Bell Helicopters and business jets under the Citation, Cessna, and Beechcraft brands.
As a golfer, I’ve always followed it because of its E-Z-Go, Cushman, and Arctic Cat brands. They’re more consumer focused businesses with solid commercial revenue as well. However, it is the aviation business that drives the company’s share price, accounting for more than 62% of its 2023 revenue.
In Q1 2024, its segment profit was $290 million, 12% higher than Q1 2023. Its aviation-related segment profit contributed all of the growth, offset by lower Industrial segment profits and losses from Textron eAviation, the company’s electrification unit.
Out of the 18 analysts that cover its stock, 11 rate it a Buy, with a $100 target, 17% higher than its current share price.
Lockheed Martin (LMT)
Lockheed Martin (NYSE:LMT) has a P/E and P/S of 16.69x and 1.65x, respectively. It is the third-largest holding of ITA with a 12.83% weighting. Its shares are up about 1% year-to-date.
Lockheed Martin’s products keep America’s military prepared to defend the country. Products from the Maryland-based defense contractor include the F-35 joint strike jet fighters, Blackhawk combat helicopters, Hellfire missiles and more.
Barron’s reported comments from Seaport Research Partners analyst Richard Safran from earlier in June that its supply chain issues are going away, providing a higher multiple for the company’s shares.
Further, while its earnings per share have tripled in the past 10 years compared to a two-fold increase for the S&P 500, its shares have traded at a discount to the index’s 12-month forward earnings.
The biggest risk for Lockheed is that it generates 75% of its revenue from the U.S. government. Should Congress take a hatchet to defense budgets post-election, that would hurt future revenue.
As of March 31, it had a backlog of $159 billion, or about 2.3x its 2023 revenue, which means it’s got plenty to keep it busy well beyond November.
RTX (RTX)
RTX (NYSE:RTX) has a P/E and P/S of 20.68x and 2.11x, respectively. It is the largest holding of ITA with an 18.85% weighting. Its shares are up more than 25% year-to-date, nearly double the index.
InvestorPlace contributor Rich DuPrey recently included RTX in a group of three stocks to buy over $100. RTX just makes the cut at $106.64 as I write this. DuPrey’s rationale for buying shares of the company best-known for its Patriot missile system and Stinger and Javelin missles, is that it’s operating in the best business environment in its history with record backlog of $202 billion.
You know what they say, “You have to make hay while the sun shines.” RTX is doing that.
The company has three operating segments: Collins Aerospace, Raytheon, and Pratt & Whitney. The latter’s Q1 2024 sales were 23% higher year-0ver-year to $6.46 billion, generating $430 million in operating profits. Of the three segments that generated nearly the same revenue in the first quarter, Pratt & Whitney has the lowest operating margin of 6.7%.
Like Lockheed Martin, analysts are on the fence about RTX stock. Of the 25 that cover it, only nine rate it a Buy, with a $109.50 target price, 3% higher than its current share price.
Of the three, Textron is my favorite.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.