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The fiscal 2024 National Defense Authorization Act calls for $886.3 billion in U.S. defense spending, up 3.3% from 2023 levels. However, the dynamics in the defense industry changed dramatically when Israel declared war on Hamas in October. The war in the Middle East may force the U.S. government to increase defense spending in the coming years, and defense stocks have jumped since the conflict began. Defense stocks are attractive investments because they often have predictable, long-term government contracts.
Here are eight defense stocks to buy with big upside potential, according to Morgan Stanley:
| Stock | Implied upside from Nov. 21 closing price |
| Northrop Grumman Corp. (ticker: NOC) | 27.6% |
| TransDigm Group Inc. (TDG) | 23.6% |
| L3Harris Technologies Inc. (LHX) | 40% |
| Howmet Aerospace Inc. (HWM) | 15.3% |
| Textron Inc. (TXT) | 13.1% |
| Curtiss-Wright Corp. (CW) | 7.9% |
| CAE Inc. (CAE) | 21.6% |
| Joby Aviation Inc. (JOBY) | 78.9% |
Northrop Grumman Corp. (NOC)
Northrop Grumman is one of the world’s largest weapons and military technology producers. Analyst Kristine Liwag says Northrop is highly exposed to two legs of the nuclear triad – the B-21 strategic bomber project and the Ground Based Strategic Deterrent intercontinental ballistic missile project. Liwag says these two massive programs could continue for decades, providing Northrop Grumman investors with stable earnings and exceptional financial visibility. Northrop reported a 1.5 book-to-bill ratio in the third quarter, and Liwag says its backlog is currently at a record high. Morgan Stanley has an “overweight” rating and $601 price target for NOC stock, which closed at $471.07 on Nov. 21.
TransDigm Group Inc. (TDG)
TransDigm designs and manufactures original aircraft parts sold to manufacturers. The company also produces aftermarket replacement parts sold to commercial and military aircraft operators. In early November, TransDigm announced a planned $1.4 billion acquisition of the components and subsystems business of Communications & Power Industries. The stock also initially jumped more than 8% when TransDigm announced a special cash dividend of $35 per share and issued upbeat guidance for 2024. Liwag says TransDigm has the most defensible business model in the commercial aerospace business. Morgan Stanley has an “overweight” rating and $1,200 price target for TDG stock, which closed at $971.03 on Nov. 21.
L3Harris Technologies Inc. (LHX)
L3Harris Technologies is an aerospace and defense company that builds communications, avionics and satellite systems. The third quarter was the first full quarter for L3Harris following its $4.7 billion acquisition of propulsion systems and energetics company Aerojet Rocketdyne. Liwag says L3Harris shares are attractively valued at a roughly 7% 2024 free cash flow yield, but the company’s capital returns will likely be restricted by its post-acquisition debt load and its planned $400 million in enterprise transformation investments. However, Liwag sees margin expansion opportunities given escalating global conflicts. Morgan Stanley has an “overweight” rating and $264 price target for LHX stock, which closed at $188.56 on Nov. 21.
Howmet Aerospace Inc. (HWM)
Howmet Aerospace manufactures lightweight metal products, specializing in jet engine components, titanium structural parts, aerospace fastening systems and forged wheels. The company also provides defense solutions, such as precision machining, integrated program management and metals expertise, for its military partners. Liwag says Howmet is the best-positioned company for the upcoming commercial aerospace cycle, and Liwag says Howmet is her top overall stock pick in the aerospace industry. Liwag says Howmet provides an attractive combination of growth and quality and has opportunities for significant capital returns. Morgan Stanley has an “overweight” rating and $60 price target for HWM stock, which closed at $52.02 on Nov. 21.
Textron is an aerospace and industrial conglomerate that manufactures Bell helicopters, Cessna aircraft, and other military and industrial equipment. Liwag says Textron’s aviation segment demand remains strong, including a 1.45 book-to-bill ratio in the third quarter. She says the company’s aviation backlog has grown to between 18 and 24 months, and Textron’s healthy balance sheet and impressive free cash flow suggest upside to capital returns in the future. In fact, the company’s remaining current buyback program represents about 16% of Textron’s shares outstanding. Morgan Stanley has an “overweight” rating and $88 price target for TXT stock, which closed at $77.78 on Nov. 21.
Curtiss-Wright Corp. (CW)
Curtiss-Wright provides specialized solutions, engineered products and other services, primarily for the aerospace and defense markets. The company’s defense electronics segment includes products such as commercial off-the-shelf embedded computing board-level modules, integrated subsystems, and data acquisition and flight test instrumentation equipment. Liwag says Curtiss-Wright’s Electronics segment is performing well thanks to supply chain improvements and favorable demand. In addition, she is bullish about the company’s future opportunities tied to the Westinghouse AP1000 nuclear reactor coolant pump. Liwag projects mid-to-high-single-digit revenue growth in the coming years. Morgan Stanley has an “overweight” rating and $229 price target for CW stock, which closed at $212.23 on Nov. 21.
CAE provides digital immersion and training services for the defense and security, civil aviation, and health care markets. The company’s defense and security segment includes training centers and services, as well as naval, air and land simulation products. Liwag is positive on CAE’s civil aviation business but says budget appropriation uncertainty and the company’s transition to higher-margin programs makes the near-term outlook for CAE’s defense business somewhat unclear. Nevertheless, she says the company generates tremendous cash flow and will likely reinstate its dividend in fiscal 2025. Morgan Stanley has an “overweight” rating and 35 Canadian dollar ($25.48) price target for CAE stock, which closed at $20.95 on Nov. 21.
Joby Aviation Inc. (JOBY)
Joby Aviation is a California-based company developing electric vertical take-off and landing aircraft. In August 2022, Joby expanded its contract with the U.S. Air Force’s Agility Prime program, which the company says could increase the contract’s value by more than $45 million. In the third quarter of 2023, Joby began flight testing with pilots aboard its aircraft and delivered its first aircraft to the Air Force. Liwag says Joby has about $1.1 billion in cash on its balance sheets and is on track to launch commercial service in 2025. Morgan Stanley has an “overweight” rating and $10 price target for JOBY stock, which closed at $5.59 on Nov. 21.
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