Aerospace and defense stocks took flight in 2022. What analysts expect for the sector in 2023

Published Mon, Jan 2 20237:55 AM EST

Aerospace and defense stocks took off in 2022, outperforming the S & P 500 as a selloff trend pummeled growth and technology names. Wall Street expects those tailwinds to continue in the new year. Through 2022, the aerospace and defense sub-industry within the S & P 500 rose 15.5%, while the broader index tumbled 19.4%. These stocks benefited from a rotation into defensive sectors offering stability in an uncertain economy. Rising geopolitical tensions, including the conflict in Ukraine, further fueled interest in the field from both stockholders and the U.S. government. Even with a solid year of gains, Wall Street analysts remain bullish on the sector in 2023, expecting more upside as the U.S. focuses on military spending and geopolitical tensions mount from the likes of Russia and China. "We expect 2023 will continue to be driven by geopolitical risk perceptions as the most significant growth from recent higher defense spending commitments do not begin to materialize until the 2024-2025 timeframe," wrote Morgan Stanley analyst Kristine Liwag in a note to clients in December. "Russia's conflict with Ukraine has provided an irreversible wakeup call around the need to sufficiently resource defense modernization efforts, jolting the U.S. and its allies into elevated spending plans," she said. Here are some of the best-performing aerospace and defense stocks of 2022 and what the outlook looks like in the new year. In search of 'defense ballast' to own Northrop Grumman was the best performer in the industry in 2022, rallying nearly 41%. Analysts are mixed on the trajectory for the stock in the new year, with just 50% having a buy or overweight rating, and the consensus price target implying a 3.4% upside from Friday's close. JPMorgan downgraded shares to neutral in October, citing the stock's recent outperformance. Morgan Stanley remains bullish, naming it a top stock pick for 2023, with a $626 price target suggesting nearly 15% upside from Friday's close. "While the company screens expensive vis-àvis peers, we see few substitutes for NOC's best-of-breed portfolio and continue to view the stock as the defense ballast to own," Liwag said. The top-performing defense stock in the fourth quarter was Boeing , with shares up more than 57%. During the quarter, the aircraft maker announced a new contract with United Airlines to purchase at least 100 Dreamliners . Wall Street expects Boeing's tailwinds to continue, with more than 6 out of 10 analysts rating the stock a buy. The consensus price target implies a 4.3% upside for the stock from Friday's close. Goldman Sachs analyst Noah Poponak also wrote in a note to clients in December that shares should benefit from recovering air travel, orders, and normalizing free cash flows. "Cash flow has inflected to positive, will accelerate over the coming years, and Boeing has taken an equity raise and near-term new aircraft development off the table — which will drive rapid delevering," he said. Raytheon Technologies rose more than 17% in 2022, and analysts are optimistic about the stock in 2023. A little over half say the stock is a buy with 6.1% upside from Friday's close. The stock currently sits more than 4% off of its all-time high set in April. Cowen named Raytheon its favorite aftermarket pick positioned to benefit from an uptick in defense spending. Goldman Sachs agreed, saying shares trade inexpensively to its peers. "We see RTX as the best way to gain exposure to the high-quality aerospace aftermarket as well as higher global defense spend without overweighting either," Poponak wrote. Another big name is L3Harris Technologies , with shares down about 2.4% in 2022. It rose 0.2% in the fourth quarter and fell 8.3% in December. More than four in ten analysts rate the stock a buy, with the average price target suggesting 26.2% upside. Citi rates it as neutral, noting concerns over the company's near-term growth. "We would become more positive on shares should the company sign a delayed international award, work through its supply chain constraints more quickly than expected, and/or manage its cost structure in [a] way that allows for current margin rates to either hold or expand," wrote Citi analyst Jason Gursky in a December note to clients. The company will be acquiring defense contractor Aerojet Rocketdyne for $4.7 billion, or $58 per share in cash. CEO Chris Kubasik told CNBC in December that the merger would satisfy a weapons system gap in their portfolio. "This is going to benefit the customers, benefit the shareholders, and it's going to benefit the employees," he said. "Customers want to strengthen competition, and they want to bolster the defense industrial base. And this acquisition does it." — CNBC's Michael Bloom contributed reporting