Boeing, Heico are among top aerospace, defense picks for 2023 at Jefferies

Boeing (NYSE:BA), Heico (NYSE:HEI) and Leidos (NYSE:LDOS) on Tuesday were listed as top picks in the aerospace and defense industries by analysts at Jefferies. They also favor Textron (NYSE:TXT), L3Harris Technologies (NYSE:LHX), Kratos Defense & Security Solutions (NASDAQ:KTOS) and Teledyne Technologies (NYSE:TDY).

The supply for aerospace and defense equipment lags demand as the industries continue to face supply-chain constraints, according to Jefferies.

“Within aerospace, the industry will look to accelerate its recovery back to normalized levels, although on our estimate at a decelerated rate,” Sheila Kahyaoglu, analyst at Jefferies, said in a Jan. 3 report. “In defense, there is likely the biggest disconnect between demand and supply, with the budgets pointing to the potential for accelerated growth.”

In the commercial aircraft industry, travel hasn’t recovered in the Asia-Pacific region as quickly as it has in the United States and Europe. That may change as China reopens from its prolonged pandemic lockdowns, driving greater demand for repair and maintenance services in what is known as the aftermarket. Heico (HEI) is poised to benefit from aftermarket growth, Jefferies said.

Boeing (BA) will boost deliveries of its best-selling 737 Max single-aisle jet from 361 last year to 410 in 2023 through a combination of newly produced planes and ones stored in inventory, Jefferies estimated. The bank also forecast that deliveries of the 787 Dreamliner dual-aisle jet will rise from 24 last year to 84 in 2023.

The effects of inflation on profit margins will depend on company exposure to easing commodity prices and right labor markets.

“For those that are reliant more on raw materials than labor, the deflationary environment for key inputs, such as metals and energy, will support further margin expansion into 2023,” according to Jefferies. “The easing of supply chain disruptions, expected in the back half of the year, will add more support as inefficiencies roll off. However, continued wage inflation is an area to watch.”

The outlook for the U.S. defense budget has improved in the past year, with Russia’s invasion of Ukraine in February being a driver of demand. However, that hasn’t necessarily translated into increased revenue for major defense companies because of supply-chain constraints.

“While the demand backdrop remains positive, the conversion to revenue has been more choppy as evidenced by investment outlays in 2022 that declined year over year,” Jefferies said. “Nonetheless, results have come at a period where appropriations for investment spending (R&D + procurement) were up 6% in FY22 with a most likely double-digit advance in FY23.”

L3Harris (LHX) “is best incrementally positioned to take advantage of the transition of the defense budget over the next decade, with general exposure to high growth areas of the budget including classified, space, and mission systems,” according to Jefferies.