Stock Investor Insights: Three Industrial Infrastructure Stocks to Buy

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Three Industrial Infrastructure Stocks to Buy


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Three industrial infrastructure stocks to buy will benefit as defense and aerospace demand flies high with war raging and commercial travel climbing.

The three industrial infrastructure stocks to buy should ascend amid defense and aerospace growth. Investors seeking to profit may find merit in each.

Demand in the United States is on the rise due to the nation's national security doctrine that seeks to use military modernization to deter adversaries, while European countries' NATO budgets are trying to catch up to keep them in good standing with the organization, according to research report by Citigroup. The thrust is catalyzed by Russia's war against Ukraine.

Company backlogs have grown 15% in the past three years and support the view that industry growth is projected at 5%. Further, margins are likely to expand as recent bookings reflect the current cost and supply chain environment, Citigroup wrote in its research note.

"Investors should look to invest in companies with accelerating revenue growth and margin expansion," the report continued.

Bob Carlson, a former pension fund chairman who heads the Retirement Watch investment newsletter, told me that several exchange-traded funds (ETFs) offer modest dividend yields focus on the aerospace and defense sector. The funds could serve as an alternative to the three industrial infrastructure stocks to buy, he added.

Bob Carlson, who heads Retirement Watch, answers questions from Paul Dykewicz.

Three Industrial Infrastructure Stocks to Buy: AeroVironment, Inc. (AVAV)

AeroVironment, Inc. (AVAV), an Arlington, Virginia-based designer and manufacturer of unmanned aerial vehicles, supplies its products for aircraft systems, tactical missile systems, high-altitude pseudo-satellites and other related services to government agencies within the U.S. Department of Defense, as well as other federal agencies and allied governments. The systems can help with security, surveillance, or sensing, as well as serve as "eyes in the sky."

Louie DiPalma, an equity analyst with Chicago-based William Blair investment firm, recently wrote a research note rating the company as "outperform" and describing his meeting with AeroVironment CEO Wahid Nawabi and members of the contractor's Tomahawk Robotics software team last week at the SOF Week conference in Tampa Bay, Florida. The meeting highlighted a Department of Defense milestone announcement and its long-term implications.

AeroVironment, with its Switchblade-600 loitering missile system and autonomous software, was the only vendor named in the Department of Defense's announcement and press conference for the newly formed high-profile multibillion-dollar Replicator program. The Replicator aims to field thousands of autonomous drones over the next 18 months to counter China, protect Taiwan and position the United States for the next-generation battlefield needs, DiPalma wrote.

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Three Industrial Infrastructure Stocks to Buy: DoD Contract Support

Thus, the next-generation battlefield will more heavily feature $150,000 loitering munitions, such as Switchblades, rather than $30 million Reapers, DiPalma wrote. In addition to being the only vendor named by the Department of Defense announcement, the company's Switchblade-600 system was selected for "accelerated fielding," he added. Nawabi discussed how AeroVironment is already in full production for the Switchblade-600 with plans for expansion.

From a financial perspective, this announcement along with the new Ukraine stimulus, suggests that there may be significant upside to consensus fiscal 2025 and 2026 estimates. The knock on AeroVironment has always been its lack of long-term visibility and revenue concentration, DiPalma said.

AeroVironment recently has won major roles for several new U.S. Department of Defense loitering munitions programs, such as Replicator, LASSO and Organic Precision Fires-Light. These new programs, along with demand from more than 20 countries for Switchblade systems, should allow AeroVironment to continue to scale revenue, even when sales associated with the Ukraine War eventually subside, DiPalma wrote.

"More than 40 countries already buy AeroVironment's Puma drone," DiPalma continued. "On May 8, Foreign Policy reported that Taiwan has recently requested the Switchblade-300 and Switchblade-600."

Three Industrial Infrastructure Stocks to Buy: Demand Jumps for Drones

From a strategic perspective, the company's announcement is one of the biggest milestone moments in its history, DiPalma continued. Drones are rapidly shaping geopolitics and their use on the battlefield is featured daily in the Wall Street Journal and Bloomberg, he added.

"Drones are shifting from being niche weapons to mainstream," DiPalma said. "The Department of Defense's decision to single out AeroVironment is a reflection of the success that AeroVironment has attained on the battlefield in Ukraine and the role of AeroVironment's autonomous software in future conflicts. Countries around the world will be eager to follow the Department of Defense's lead and build their own inventory of Switchblade-600s."

Chart courtesy of www.stockcharts.com

Three Industrial Infrastructure Stocks to Buy: TransDigm Group (TDG) Growth

TransDigm Group Incorporated (NYSE: TDG), a Cleveland-based global designer, producer and supplier of highly engineered aircraft components, is another industrial infrastructure stock. The strength of the defense industry helped the company beat consensus analysts' estimates and raise its guidance after its latest earnings report on Tuesday, May 7.

The share price of TransDigm traded down 3% early on Wednesday, May 8, but reversed course later in the day after the company's earnings call to finish the trading session in positive territory. Investors likely initially focused on the company's commercial aftermarket growth rate, which slowed to 8% in the second quarter from 25% in the first quarter. Weakened commercial aftermarket growth stemmed from a decline in freight revenue, while passenger transport remained strong, DiPalma wrote in a recent research note.

TransDigm's management reiterated its outlook for 15% commercial aftermarket revenue growth, implying a reacceleration in the second half, DiPalma wrote. The company's management indicated that aftermarket demand remains robust.

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Three Industrial Infrastructure Stocks to Buy: 'Long Runway' Ahead

Company leaders forecast a "long runway for growth" as demand for travel climbs, surpassing pre-pandemic levels for the first time, DiPalma continued. Defense revenue showed strength in the last quarter, outperforming expectations on improved defense outlays.

TransDigm raised its full-year outlook for consolidated revenue and earnings before interest, taxes, depreciation and amortization (EBITDA), reflecting the outperformance in the defense market, DiPalma wrote.

"We expect that depressed aircraft production over the past three years, combined with revenge travel, will result in an aviation aftermarket supercycle for the next decade," DiPalma continued. "Airlines will continue to extend the lives of aging aircraft with spare parts to accommodate the robust travel demand coming out of the pandemic, driving steady growth for the aftermarket parts and services industry. TransDigm has taken advantage of the slowdown in new aircraft deliveries and aging aircraft fleets, which have increasing needs for reliable replacement parts."

The various financial "tailwinds" will support TransDigm's earnings growth and provide upside to its historical valuation, DiPalma wrote. Accordingly, DiPalma reaffirm his "outperform" rating.

Three Industrial Infrastructure Stocks to Buy: Second-quarter Surge

The recommendation of TransDigm is supported by its second-quarter revenue topping consensus estimates. TransDigm reported second-quarter revenue of $1.92 billion, compared with consensus estimates of $1.88 billion. Second-quarter revenue growth rose 20.5%, compared to a 28.1% rise in the first quarter. Organic growth in the second quarter reached 16.1%, while organic commercial original equipment manufacturing (OEM) growth hit 21%, commercial aftermarket gains touched 8% and defense revenue growth soared 21%.

Adjusted EBITDA at TransDigm of $1,021 million in the second quarter topped consensus of $979 million. EBITDA margins expanded 190 basis points over last year to 53.2%. Adjusted earnings per share (EPS) of $7.99 in the second quarter beat consensus estimates of $7.42.

On the strength of second-quarter results, TransDigm raised fiscal 2024 guidance across the board. Management now expects full-year revenue of $7.740 billion at the midpoint, compared to the prior guidance of $7.665 billion. Adjusted EBITDA is forecast to be $4.045 billion at the midpoint, compared to the prior guidance of $3.985 billion. The adjusted EPS is expected to have a midpoint of $32.42, compared to prior guidance of $30.85.

Chart courtesy of www.stockcharts.com

Three Industrial Infrastructure Stocks to Buy: Curtiss-Wright (CW)

Davidson, N.C.-based Curtiss-Wright (NYSE: CW) dates back to Orville and Wilbur Wright's first flight in 1903, and Glenn Curtiss, regarded as a pioneer of naval aviation. In 1929, the companies founded by these three great aviation innovators led to the creation of Curtiss-Wright Corporation, combining Curtiss Aeroplane and Motor Company and Wright Aeronautical Corporation. At the time of the merger, Curtiss-Wright ranked as the largest aircraft company.

The company focuses on innovation and advanced engineering, while applying capability to key applications in high-performance markets. Curtiss-Wright's management aims to develop long-standing customer relationships to support significant growth and profitability in the markets it serves.

The company's revenues are generated by providing solutions through three segments: Aerospace & Industrial, Defense Electronics and Naval & Power. Those three niches arguably are among the largest and most vital industries in the world.

Three Industrial Infrastructure Stocks to Buy: Share Repurchase Program

Curtiss-Wright recently announced a $300 million increase to its share-repurchase program, bringing the total authorization to $400 million. The company also declared a 5% increase to raise its quarterly dividend to $0.21 per share. In total, Curtiss-Wright has repurchased more than $450 million of shares since 2021.

The company will host an investor day in New York City on May 21, when DiPalma wrote he expects it to its long-term organic growth strategy and introduce three-year financial targets with growth assumptions. He acknowledged taking special interest in the company's commentary about its commercial nuclear business. DiPalma also wrote he expects an update on Curtiss-Wright's capital allocation priorities and mergers and acquisitions (M&A) strategy.

"We forecast mid-single-digit consolidated revenue growth through 2027," DiPalma wrote. "We expect operating margin to expand from 17.4% in 2023 to 17.8% in 2026 and 18.0% in 2027."

Chart courtesy of www.stockcharts.com

Geopolitical Risk Rises With Death of Aid Workers and Gaza Civilians

Geopolitical risk unfortunately is mounting. Israel is continuing its efforts to find and destroy an extensive tunnel system in neighboring Gaza that has been used to stockpile weapons, as well as hide the Hamas leaders and militants who were responsible for the Oct. 7 attack that killed an estimated 1,200 people and took 240 hostages.

But the Gaza Ministry of Health estimates that a total of nearly 35,000 Hamas fighters and civilians have lost their lives there since the war began Oct. 7. Those civilians include aid workers, including seven World Central Kitchen food providers who perished when the three vehicles that they were using were fired upon by Israel Defense Forces (IDFs) who reportedly mistook them for militants.

Chef José Andrés, World Central Kitchen's leader, called for an independent investigation and said the convoy was marked with a sign of his charity, which reported its planned movements to the IDF in advance. The IDF announced that two senior officers were dismissed as a result of its probe of the incident.

U.S. President Joe Biden warned Israel's Prime Minister Benjamin Netanyahu that the United States would start to withhold weapons from Israel is too aggressive with its military operations in Rafah, a key city in Gaza where Hamas has based many fighters. Netanyahu has said he is responsible for protecting his citizens from attacks, gaining the freedom of its hostages and eliminating the threat posed by Hamas. Hundreds of IDF soldiers have lost their lives since entering Gaza to carry out their military mission in response to the Oct. 7 raid of Israeli communities near its border with Gaza.

In Ukraine, Russia's military forces keep advancing. Long-term shortages of artillery shells and other arms have stymied Ukraine's efforts to fend off Russia's unrelenting attacks as the U.S. Congress required time to reach a bi-partisan agreement to provide foreign aid.

Ukraine officials reported Friday, May 10, that a Russian armored attack in the northeastern Kharkiv region was pushed back, after Moscow's forces launched an incursion across the border and sought to breach front lines. In the town of Vovchansk, 75km, or 45 miles northeast of Kharkiv, a local leader said it faced a heavy attack in the early hours May 10, forcing the evacuation of civilians. Among the 3,000 people who live in Vovchansk, at least one person was killed and five others injured in the barrage, the local leader said.

The three industrial infrastructure stocks to buy should rise amid defense and aerospace growth. Investors interested in profiting from the gains may want to buy shares while they are ascending.


Paul Dykewicz, Editor

About Paul Dykewicz:

Paul Dykewicz is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, Seeking Alpha, GuruFocus and other publications and websites. Paul is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is the editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul also is the author of an inspirational book, "Holy Smokes! Golden Guidance from Notre Dame's Championship Chaplain", with a foreword by former national championship-winning football coach Lou Holtz. Follow Paul on Twitter @PaulDykewicz.

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