We may not exactly be bullish on the U.S. stock market in aggregate, but along the way have been identifying the proverbial needles in the haystack – secular sector themes where current pricing is too low relative to the expected profits and cash flow. Aerospace and defence stocks have long been in that bucket, and we thought it was time for a review and update, especially as geopolitical tensions escalate and defence budgets across the planet expand sharply.
Let’s dive deeper into the sector – focusing on the U.S. and European companies that comprise the vast majority of public market exposure. It goes without saying that price performance continues to be strong, jumping 32 per cent over the past year on a global basis and outperforming the broad MSCI All Country World Index by roughly 10 percentage points over this period. Regionally, the group has surged by a similar 32 per cent in the U.S. and by nearly 43 per cent in Europe.
Benchmarking multiples against expected earnings growth through the PEG ratio may not be as attractive as they were – going from at or below 1.0x nearly 12 months ago to between 1.5x to 2x currently, shifting to “fairly valued” from “undervalued” in the process. But there is one clear standout winner that we believe should draw investors’ attention – Europe.
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