NEW YORK (AP) — A Citi Investment Research analyst laid out his top picks in commercial aerospace and defense on Friday, and said Boeing is in the best position because of its high order backlog.
Analyst Jason Gursky raised his price target on Boeing Co. by $5, to $87, and slightly raised his profit expectation for this year and next.
He also raised his price target on General Dynamics Corp. by $1, to $88.
Gursky wrote that he expects Boeing to book orders for roughly 1,200 commercial planes, driven by its 737 Max, which is getting a new engine, and the 777. Cash flow will improve as production speeds up. The Chicago company has dozens of its new 787s that are being reworked so they can be delivered; those deliveries will bring in cash.
One worry for aerospace companies has been their exposure to defense. Military spending in the U.S. is expected to shrink over the next 10 years, and spending from other regions is under pressure, too, as governments cut spending.
Boeing gets nearly half its revenue from defense and space spending. Gursky wrote that this segment might not hurt the company as badly as some are assuming, though. It will benefit from a recently-signed $30 billion order from Saudi Arabia for F-15s jets, and an expected order Apache helicopters. Also, expected delays to the F-35 fighter program could actually boost demand for Boeing's existing F/A-18.
General Dynamics has mostly been a defense company but that is changing as its Gulfstream business jet business grows. It's now about 30 percent of the company's estimated 2013 earnings, Gursky wrote. Business jet growth dropped sharply after the 2008 but it should begin picking up, Gursky wrote.
Airplane parts maker Precision Castparts Corp. will also benefit from production ramp-ups. It should be able to absorb the demand without needing to add much new capacity, Gursky wrote. That would be good for profit margins. The company also makes components for the energy sector, which is growing.
Gursky also wrote that Raytheon Co. should perform better than others as international demand speeds up. Raytheon is a defense and space contractor, and over the long run its electronics and missile components should help it overcome tight defense spending, Gursky wrote.
Lockheed Martin Corp. will actually benefit from tight defense spending as the Pentagon shifts to spending on existing programs instead of developing new ones. And its presence in missile defense and fighter jets should help it grow faster than competitors, he wrote.
Gursky has an $89 price target on Lockheed shares, saying that while they won't be valued as highly as they were during the big defense-spending years of the past decade, they should at least be valued more than they are now. Lockheed fell 9 cents on Friday to $79.98.
Other aerospace and defense companies were also little changed. Boeing rose 40 cents to $73.93. Precision Castparts rose 6 cents to $168.98. Raytheon was up 8 cents to $48.13. General Dynamics gained 7 cents to $67.47.