Aerospace and Defense Stocks

About Aerospace and Defense Stocks

Defense is about as close to guaranteed revenue as public markets offer. The customer is a government, the budgets are set years ahead, and geopolitical tension is a demand driver that shows no sign of easing. The trade-off is that growth is capped by appropriations and the stocks are political, moving on election outcomes and budget negotiations rather than on anything the companies do.

Commercial aerospace is the better business and the one with the real moat. A certified part stays on an airframe flying for decades, throwing off spare and repair revenue long after the original sale is paid for, and certification means competitors cannot simply undercut it. Some of these companies earn more maintaining fleets already flying than from anything new, and that revenue follows flight hours rather than aircraft orders. It is the closest thing to an annuity in industrials.

The risk is contract type. On cost-plus work the customer absorbs overruns. On fixed-price development programs the contractor eats them, and fixed-price contracts on first-of-a-kind projects have produced spectacular write-downs at companies that looked perfectly safe. Backlog tells you the revenue is coming, not that it will be profitable.

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