Goldman Sachs tells clients to get behind these 2 stocks because of Trump

Published Mon, Feb 6 201711:04 AM EST

Goldman Sachs on Monday told clients to buy two aerospace and defense companies that could emerge as the biggest beneficiaries of increased military spending by the Trump administration. "Our political economist, Alec Phillips, expects defense spending will rise starting in October 2017 when FY 2018 [fiscal year] appropriations begin. However, it is possible (but not our expectation) that Congress will boost government spending on defense for the remainder of the current fiscal year (May to September)," Goldman Sachs' chief U.S. equity strategist David Kostin wrote in a research note. Since the election, the aerospace and defense industry has outperformed the market, up 9 percent compared with a gain of 7 percent for the S & P 500 index. That outperformance will continue in the months ahead even after protectionist policies proposed by President Donald Trump cause some market volatility, Goldman said. "Trump proposals related to destination-based border-adjusted taxes, corporate tax rates, and capital expensing would benefit the aerospace & defense industry," Kostin wrote. The strategist says aerospace and defense companies derive a "significant" portion of their revenue from exports, a trend that could benefit them should the destination-based border tax be implemented. "Given the uncertainty around Trump tax proposals, we expect these stocks will outperform the S & P 500 irrespective of the final outcomes. In contrast, we forecast a 1% return for S & P 500 in 2017," Kostin wrote. A decrease in corporate taxes at home could further strengthen these companies' balance sheets, as historically they've paid higher-than-average taxes. "A lower US statutory corporate tax rate would benefit A & D [aerospace and defense] stocks, as the average effective tax rate in the industry has been 31% during the past decade vs. 29% for the average S & P 500 stock," Kostin said. Although a strong dollar often hurts firms with high international sales, Goldman Sachs noted that aircraft sale transactions are insulated from this trend, as they are quoted in dollars regardless of buyer and seller. At the current levels, the aerospace and defense sector trades at a price-earnings multiple equal to that of the market, when historically it's traded at a premium, according to Kostin's estimates. Goldman says Northrup Grumman and L-3 Technologies are best positioned in the industry due to accelerated sales and EPS growth. In the next 12 months, Goldman predicts shares of Northrup Grumman could trade as high as $280, implying a gain of more than 20 percent from Friday's close. The investment firm has a buy rating on the stock. Goldman analyst Noah Poponak writes on his investment thesis for Northrup Grumman: " The federal government accounts for 84% of revenues, and the firm is the least exposed to foreign sales (14% of total) within A & D, limiting its exposure to trade friction." Goldman has a 12-month price target of $179 on L-3 Technologies, implying a gain of 14 percent from the current level. The stock has a buy rating. "L-3 Technologies (LLL) sales and EPS growth will accelerate to 4% and 12% in 2018 from 3% and 6% in 2017, " writes Poponak.

Northrup Grumman MQ-8C Fire Scout unmanned helicopters

Source: Northrup Grumman

Goldman Sachs on Monday told clients to buy two aerospace and defense companies that could emerge as the biggest beneficiaries of increased military spending by the Trump administration.

"Our political economist, Alec Phillips, expects defense spending will rise starting in October 2017 when FY 2018 [fiscal year] appropriations begin. However, it is possible (but not our expectation) that Congress will boost government spending on defense for the remainder of the current fiscal year (May to September)," Goldman Sachs' chief U.S. equity strategist David Kostin wrote in a research note.

Since the election, the aerospace and defense industry has outperformed the market, up 9 percent compared with a gain of 7 percent for the S&P 500 index.

That outperformance will continue in the months ahead even after protectionist policies proposed by President Donald Trump cause some market volatility, Goldman said.