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Sydnee Gatewood
Sydnee Gatewood
Articles (2960) 

3 Undervalued Aerospace and Defense Companies to Consider

These stocks are undervalued based on the GF Value line

September 28, 2020 | About:

While traditional airlines continue to suffer lower traffic levels due to the Covid-19 pandemic, two more analysts threw their support behind space tourism company Virgin Galactic Holdings Inc. (NYSE:SPCE) on Monday, sending shares up as much as 22%.

Joining six other ratings firms, CNBC reported that Bank of America and Susquehanna began coverage of the stock with buy ratings even though the company has yet to begin commercial services and lacks significant revenue. Regardless, Virgin Galactic is closing in on its final development milestones and has two key remaining test flights. The company revealed in August it plans to fly founder Sir Richard Branson into space in the first quarter of 2021, effectively kicking off its services to the public.

As a result of these developments, investors may be interested in finding opportunities among companies in the aerospace and defense industry.

Using the GuruFocus Fair Value Line, a new unique method of estimating the intrinsic value of a stock, investors can find potential value opportunities. Based on the popular Peter Lynch value line, which compares a stock's current price to how much its earnings per share would be worth if it traded at a price-earnings ratio of 15, the GF Value Line takes more than price into account when determining value. It also considers a company's historical price-earnings, price-book, price-sales and price-to-free cash flow ratios, an adjustment factor based on past returns and growth as well as future estimates of the business' performance.

Using the GF Value Line for Boeing Co. (NYSE:BA) as an example, we can see that the stock is considered to be a potential value trap. The share price is represented by the blue line, while the solid black line shows the past intrinsic values calculated by the GF Value Line. The dotted portion of the black line illustrates the estimates of future intrinsic value. The red and green bands delineate overvaluation and undervaluation, respectively, with the darker shades indicating more severe deviations from the intrinsic valuation.

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As of Sept. 28, the GuruFocus All-in-One Screener, a Premium feature, found aerospace and defense companies that were modestly to significantly undervalued, had a price-to-GF value between 0.4 and 0.8 and a predictability rank of at least two out of five stars were General Dynamics Corp. (NYSE:GD), Hexcel Corp. (NYSE:HXL) and Kaman Corp. (NYSE:KAMN).

General Dynamics

General Dynamics has a $40.66 billion market cap; its shares were trading around $141.74 on Monday with a price-earnings ratio of 12.58, a price-book ratio of 2.94 and a price-sales ratio of 1.07.

The Reston, Virginia-based company manufactures everything from Gulfstream business jets and combat vehicles to nuclear-powered submarines and communications systems.

Based on a GF Value of 194.4 and a price-to-GF Value ratio of 0.73, the stock appears to be modestly undervalued.

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The GuruFocus valuation rank of 6 out of 10 also points to undervaluation.

GuruFocus rated General Dynamics' financial strength 5 out of 10. Although the company has issued approximately $10.2 billion in new long-term debt over the past three years, it is still at a manageable level due to adequate interest coverage. The Altman Z-Score of 2.72 also indicates the company is under some stress since its assets are building up faster than revenue is growing.

The company's profitability fared better, scoring a 7 out of 10 rating. Even though margins are declining, General Dynamics is supported by returns that outperform a majority of competitors as well as a moderate Piotroski F-Score of 5, which suggests business conditions are stable. Due to recording a slowdown in revenue per share growth over the past 12 months, the predictability rank of two out of five stars is on watch. According to GuruFocus, companies with this rank return, on average, 6% annually over a 10-year period.

Of the gurus invested in General Dynamics, Barrow, Hanley, Mewhinney & Strauss has the largest stake with 0.76% of outstanding shares. Other major guru shareholders include PRIMECAP Management (Trades, Portfolio), Bill Nygren (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Tom Gayner (Trades, Portfolio) and NWQ Managers (Trades, Portfolio).

Hexcel

Hexcel has a market cap of $2.9 billion; its shares were trading around $34.74 on Monday with a price-earnings ratio of 15.23, a price-book ratio of 2.02 and a price-sales ratio of 1.43.

Headquartered in Stamford, Connecticut, the company manufactures structural materials like carbon fiber, honeycomb and other composites for the commercial aerospace industry.

With a GF Value of 69.7 and a price-to-GF Value ratio of 0.5, the stock appears to be significantly undervalued.

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The GuruFocus valuation rank of 8 out of 10 also leans toward undervaluation.

Hexcel's financial strength was rated 5 out of 10 by GuruFocus. Despite issuing approximately $438.2 million in new long-term debt over the past three years, it is at a manageable level since the company has sufficient interest coverage. The Altman Z-Score of 2.97, however, suggests it is under some pressure since its assets are building up at a faster rate than revenue is growing.

The company's profitability scored an 8 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 5. Hexcel's 2.5-star predictability rank is on watch, however, due to a decline in revenue per share over the past year. GuruFocus says companies with this rank return an average of 7.3% annually.

With 0.32% of outstanding shares, Michael Price (Trades, Portfolio) is Hexcel's largest guru shareholder. Gayner, Chuck Royce (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Lee Ainsle also own the stock.

Kaman

Kaman has a $1.11 billion market cap; its shares were trading around $40.16 on Monday with a price-earnings ratio of 6.16, a price-book ratio of 1.38 and a price-sales ratio of 1.39.

The Bloomfield, Connecticut-based company, which operates in the aerospace, medical and industrial markets, produces aircraft bearings and components, provides military solutions for missile and bomb systems and builds heavy-lift and maritime helicopters.

Trading with a GF Value of 66.74 and a price-to-GF Value ratio of 0.6, the stock appears to be a potential value trap.

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The GuruFocus valuation rank of 4 out of 10, however, suggests the stock is overvalued even though the price-earnings ratio is near a 10-year low.

GuruFocus rated Kaman's financial strength 5 out of 10. In addition to poor interest coverage, the Altman Z-Score of 2.64 shows the company is under pressure since its Sloan ratio is indicative of poor earnings quality and its revenue is declining.

The company's profitability scored a 7 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 6. It also has a 4.5-star predictability rank. GuruFocus data shows companies with this rank typically return 10.6% annually on average.

Gabelli is the company's largest guru shareholder with an 8.21% stake. Greenblatt also has a position in the stock.

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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