3 Must-Buy Companies in an Essential But Little-Known Tech Niche
Without the products of avionics companies, aircraft couldn't fly.
That makes this technology niche one of the best growth opportunities in the aerospace market, yet most probably never think about it.
With constant development under way to churn out the latest technology, avionics companies are making planes safer and more efficient, helping the military combat terror and also giving strength to support services such as air ambulances and emergency rescue operations. In a world where terror attacks are threatening to alter the way people live, these additions to aircraft fleets are a boon.
Here is a look at the top three companies shaking up the market and making this futuristic technology a reality.
1. Honeywell International (HON) - Get Report
Runway overruns cause one of five commercial plane crashes, according to Boeing.
Airbus' statistic is even more dire, as it holds overruns responsible for one-third of all airliner accidents in the world.
To heighten safety and avert such incidents, Honeywell Internationalhas developed its SmartLanding technology, which determines the trajectory of an aircraft as it approaches the runway.
Honeywell International scores higher than Rockwell Collins, below, in terms of beating quarterly revenue expectations by a sizable margin.
Whereas Rockwell Collins has beaten revenue estimates during three of the past eight quarters, Honeywell International's count stands at six over the same period. It has also registered gains of close to 14% in the past year and is expected by analysts to still go at least 6% higher.
Analysts have pegged Honeywell International's annual earnings growth for the next five years at 8.55%, which would outperform the expectations of 7.5% growth for the S&P 500.
2. Rockwell Collins
(COL)
This company may have experienced flat stock growth over the past year, but with an arsenal of new avionics products, it is poised to take off.
In fact, according to the median estimate of Thomson Reuters consensus analysts, the stock could gain 14%.
Rockwell Collins is set to equip military aircraft with its Pro Line Fusion avionics system, starting with the Embraer KC-390. The system's big display formats, improved graphic capabilities and synthetic vision capability will improve pilots' performance.
Plus, the company has developed a system to vastly improve aircraft cargo handling and aerial delivery control, as well as a helmet that gives F-35 pilots the ability to see through their airplanes to better identify their targets.
For full-year fiscal 2016, management expects earnings in the range of $5.45 to $5.65 a share, compared with $5.05 a share, an 8% to 12% jump.
With an average price-earnings ratio of 15.7 times, compared with 21.98 times times for the industry and 19.22 times for competitor Raytheon, a dividend yield of 1.5% and a very low payout ratio of 26.35%, Rockwell Collins comes cheap and has plenty of growth potential.
3. Thales
(THLEF)
French company Thales has developed a suite for self-protection technology for aircraft. Along with Italian electronic warfare specialist Elettronica, Thales has unveiled a system to protect aircraft from external threats.
The Cybele electronic warfare system will also provide protection to medium-sized helicopters in addition to aircraft. Thales has also scored a contract to power South Korea's light attack helicopters with a helmet-mounted sight and display monocular system to be installed in the early 2020s.
Trading on the over-the-counter market in the U.S., Thales' stock has rallied a whopping 47% in the past year. Add to that a modest 1.74% dividend yield and it is a power stock offering both regular income and capital appreciation.
With aerospace defense spending picking up in countries such as China, India, Russia and Saudi Arabia, Thales is well positioned to record gains. The company is increasing its focus on India and is waiting to close a deal with the country on the purchase of Rafale fighter jets.
The company has beaten the analyst earnings estimates in the past three of four half yearly reports and is expected to report 7.3% earnings growth for the first half, compared with a year earlier.
Analysts also expect the company to outperform the S&P 500 for at least the next five years in terms of earnings growth.
The biggest downside to the stock is its exposure to the struggling euro, which could affect returns. But for those who are bullish on the European currency in the long run, this is one of the best picks in the sector.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.