Investing.com – RBC Capital Markets Ratings Update

RBC Capital Markets has revised ratings and outlooks for major companies in the Aerospace & Defense sector as they approach 2025. The analysis reflects a mix of optimism and caution across the industry.

Market Sentiment

Analysts at RBC note that while the overall sentiment for aerospace is strong, recent changes in defense and aftermarket dynamics have led to selective stock rating adjustments.

Upgrades

RBC upgraded RTX Corporation and Hexcel (NYSE:HXL) to "outperform" from "sector perform". This change is due to their favorable market positions:
– RTX has a balanced portfolio that includes both defense and aerospace components, providing resilience against sector-specific volatility. Improvements in its Geared Turbofan program and growing missile demand are key growth drivers.
– Hexcel is expected to gain from its exposure to the original equipment aerospace market and recalibrated investor expectations for 2025-2026.

Downgrades

Conversely, General Dynamics (NYSE:GD) and V2X, Inc. saw their ratings lowered to "sector perform" from "outperform" due to:
– General Dynamics facing challenges with Gulfstream deliveries and a risky defense portfolio.
– V2X dealing with flat margins and uncertainties regarding services and international defense exposure, leading to a conservative outlook.

Broader Trends

RBC analysts highlighted industry-wide trends:
– The commercial aerospace aftermarket is beginning to normalize after a supercycle of growth, yet fundamental demand remains strong, supported by forecasts from IATA and limited aircraft retirements.
– Investors are advised to focus on diversified aerospace revenue companies like Safran (EPA:SAF) and Loar Holdings that navigate both OE and aftermarket dynamics.

Defense Outlook

The defense landscape has become more complex with Trump’s return and the establishment of the Department of Geopolitical Engagement. Overall defense spending is expected to rise, but uncertainties about funding allocations—especially for Ukraine—pose risks.

RBC's Top Picks for 2025

RBC identifies top investment opportunities in the Aerospace & Defense sector:
– Howmet Aerospace: poised for strong OE and aftermarket demand.
– RTX Corporation: solid defense portfolio and aftermarket prospects.
– Safran: backed by strong aftermarket fundamentals and attractive valuation.
– Loar Holdings: balanced OE and aftermarket exposure with potential M&A catalysts.
– VSE Corporation: positioned for growth through strategic deals, transitioning into a pure-play aerospace firm.
– Kratos Defense (NASDAQ:KTOS): expected to benefit from increased focus on technology and cost efficiency.