NEW YORK (TheStreet) -- Goldman Sachs (GS) - Get Report is expecting aerospace and defense companies to outperform the broader industrials sector when third-quarter earnings kick off next week.

"Relative to certain other Industrials end-markets, where there are multiple headwinds that could negatively impact 3Q15 results and forward outlooks, well positioned aerospace suppliers, those with high-margin recurring revenue aerospace aftermarket, and especially Defense, should be fairly shielded from those headwinds, potentially driving better relative (vs. Industrials) performance for our sector on average through the reporting season," according to Goldman's note to clients out on Monday.

Here are Goldman's three top picks in the sector as well as three stocks it is least optimistic about heading into earnings. The stocks are paired with ratings from TheStreet Ratings for added perspective.

TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

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LMT

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1. Lockheed Martin (LMT) - Get Report
Year-to-date return: 11.3%

Goldman Sachs Rating/Price Target: Conviction List Buy/$234
Goldman Sachs Said: We expect LMT to raise its full-year 2015 EPS guidance range as the current range appears conservative, especially with respect to segment operating margins. The company has raised EPS guidance with 3Q results in all of the last 4 years.

We expect an update on timing regarding the pending Sikorsky transaction and the IT & Services review. LMT expects the majority of Sikorsky integration costs to occur in 2016 but said it could incur some costs in 2015 depending on timing.

3Q Items of Focus: JSF program performance, unit cost reduction target, and block buy; Sikorsky and IT & Services review; International opportunities; Operating margin targets; Free cash flow generation; Capital deployment priorities; Long-range strike bomber.

TheStreet Said: TheStreet Ratings team rates LOCKHEED MARTIN CORP as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

We rate LOCKHEED MARTIN CORP (LMT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, growth in earnings per share, increase in net income, revenue growth and notable return on equity. We feel its strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The stock has not only risen over the past year, it has done so at a faster pace than the S&P 500, reflecting the earnings growth and other positive factors similar to those we have cited here. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • LOCKHEED MARTIN CORP has improved earnings per share by 6.5% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, LOCKHEED MARTIN CORP increased its bottom line by earning $11.21 versus $9.04 in the prior year. This year, the market expects an improvement in earnings ($11.40 versus $11.21).
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Aerospace & Defense industry average. The net income increased by 4.5% when compared to the same quarter one year prior, going from $889.00 million to $929.00 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 5.1%. Since the same quarter one year prior, revenues slightly increased by 3.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Aerospace & Defense industry and the overall market, LOCKHEED MARTIN CORP's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • You can view the full analysis from the report here: LMT
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TDG

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2. TransDigm (TDG) - Get Report
Year-to-date return: 12.9%

Goldman Sachs Rating/Price Target: Buy/$260
Goldman Sachs Said: TDG will likely provide its initial FY2016 outlook, which we expect to be in-line with or slightly above consensus as we see upside to consensus levels, but initial guidance tends to be conservative. We expect TDG to earn $10.70 in FY2016, 4% greater than current consensus of $10.28. Our model assumes: Organic yoy growth rates by end market: Aerospace OE up 3%, Aerospace aftermarket up 9%, Defense up 4%; EBITDA as defined margin of 43.4%, down 180 bp yoy; No incremental capital deployment.

We also expect TDG to provide a positive update on both the current M&A environment and commercial aerospace aftermarket trends (relative to recently reset expectations), both of which we believe are significant for the stock.

3Q Items of Focus: Commercial aftermarket trends; M&A pipeline, dry powder & leverage; Pricing power; Future Defense growth; Acquisition integration and margin levels; Organic new aircraft content development.

TheStreet Said: TheStreet Ratings team rates TRANSDIGM GROUP INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

We rate TRANSDIGM GROUP INC (TDG) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, compelling growth in net income, good cash flow from operations and solid stock price performance. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • TDG's revenue growth has slightly outpaced the industry average of 5.1%. Since the same quarter one year prior, revenues rose by 13.2%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • TRANSDIGM GROUP INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, TRANSDIGM GROUP INC increased its bottom line by earning $3.18 versus $2.42 in the prior year. This year, the market expects an improvement in earnings ($8.74 versus $3.18).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Aerospace & Defense industry. The net income increased by 512.7% when compared to the same quarter one year prior, rising from $16.18 million to $99.11 million.
  • Net operating cash flow has increased to $190.51 million or 47.63% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 26.96%.
  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period. Although other factors naturally played a role, the company's strong earnings growth was key. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.
  • You can view the full analysis from the report here: TDG
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OA

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3. Orbital ATK (OA)
Return from Feb. 10, 2015: 28.7% (completion of merger between Orbital Sciences corp. and the Aerospace and Defense Groups of Alliant Techsystems)

Goldman Sachs Rating/Price Target: Buy/$97
Goldman Sachs Said: We see a strong bookings quarter; which when combined with 1H bookings strength starts to generate a lot of upside risk to estimates.

We expect OA to reiterate its 2015 EPS guidance. We see more upside than downside risk to the range given recent order strength, though it could be more impactful to 2016 than 2015.

3Q Items of Focus: Merger integration process and synergy objectives; CRS2; Commercial satellites demand; Defense business outlook; A350 and Aerospace composite growth.

TheStreet Said: no rating available. 

Here are Goldman's three least-favorite aerospace & defense companies for third quarter earnings.

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ESL

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4. Esterline Technologies Corp.  (ESL)
Year-to-date return: -29.6%

Goldman Sachs Rating/Price Target: Neutral/$82
Goldman Sachs Said: ESL will likely provide initial FY2016 guidance with this earnings report. We expect the initial EPS outlook to come in below consensus.

For FY2016, we forecast 2% total company organic revenue growth, 100 bp of adjusted segment operating margin expansion, flat interest expense, a share count reduction of 1.1mn and a 22% tax rate. We do not see meaningful upside to any of those inputs, yet our bottom line EPS estimate of $5.30 is well below consensus of $5.83, and ESL will likely look to leave some cushion in its initial outlook.

3Q Items of Focus: Cost and efficiency initiatives; Barco integration; CFM-56 trends; Short cycle defense trends; Cash generation, capital deployment and the M&A pipeline.

TheStreet Said: TheStreet Ratings team rates ESTERLINE TECHNOLOGIES CORP as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

We rate ESTERLINE TECHNOLOGIES CORP (ESL) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, feeble growth in the company's earnings per share and deteriorating net income.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The current debt-to-equity ratio, 0.59, is low and is below the industry average, implying that there has been successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.46, which illustrates the ability to avoid short-term cash problems.
  • 40.58% is the gross profit margin for ESTERLINE TECHNOLOGIES CORP which we consider to be strong. Regardless of ESL's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 5.74% trails the industry average.
  • ESL, with its decline in revenue, slightly underperformed the industry average of 5.1%. Since the same quarter one year prior, revenues slightly dropped by 2.0%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • ESTERLINE TECHNOLOGIES CORP's earnings per share declined by 21.1% in the most recent quarter compared to the same quarter a year ago. Earnings per share have declined over the last year. We anticipate that this should continue in the coming year. During the past fiscal year, ESTERLINE TECHNOLOGIES CORP reported lower earnings of $5.15 versus $5.22 in the prior year. For the next year, the market is expecting a contraction of 14.6% in earnings ($4.40 versus $5.15).
  • The company, on the basis of change in net income from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and the Aerospace & Defense industry average. The net income has significantly decreased by 26.8% when compared to the same quarter one year ago, falling from $38.91 million to $28.50 million.
  • You can view the full analysis from the report here: ESL
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TGI

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5. Triumph Group (TGI) - Get Report
Year-to-date return: -33.3%

Goldman Sachs Rating/Price Target: Neutral/$48
Goldman Sachs Said: We see downside risk to the mid-point of TGI's full-year EPS outlook, given its significant exposure to programs in A&D that have volume pressure, and a mixed recent operational track record.

We expect TGI to provide an update on the 747 program. Boeing recently agreed to take over manufacturing of fuselage panels starting in 2018, and TGI reportedly plans to exit manufacturing of other 747 work, including tail, floor beams and flight surfaces.

TGI has said it expects FY2016 to be 2H weighted for both EPS and cash flow.

3Q Items of Focus: 747-8 program; Tulsa integration details; Future Aerostructures top-line rate of change; Free cash flow trajectory; Share repurchases and capital deployment strategy.

TheStreet Said: TheStreet Ratings team rates TRIUMPH GROUP INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

We rate TRIUMPH GROUP INC (TGI) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, attractive valuation levels and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, deteriorating net income and disappointing return on equity.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • TGI's revenue growth has slightly outpaced the industry average of 5.1%. Since the same quarter one year prior, revenues slightly increased by 7.0%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.70, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Despite the fact that TGI's debt-to-equity ratio is low, the quick ratio, which is currently 0.69, displays a potential problem in covering short-term cash needs.
  • Net operating cash flow has significantly decreased to -$148.39 million or 185.08% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 27.14%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 48.37% compared to the year-earlier quarter. Despite the heavy decline in its share price, this stock is still more expensive (when compared to its current earnings) than most other companies in its industry.
  • You can view the full analysis from the report here: TGI
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ERJ

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6. Embraer SA  (ERJ) - Get Report
Year-to-date return: -25.5%

Goldman Sachs Rating/Price Target: Neutral/$25
Goldman Sachs Said: We expect Embraer to reiterate all components of its 2015 outlook, but see risk to the revenue and EBIT margin guidance given FX headwinds, pricing competition, and mix. We think the high end of the 2015 EBIT guidance range is a high bar.

We expect little directional change in tone on the overall regional jet and business jet end markets.

ERJ expects higher R&D and capex in 2H15 relative to 1H15 based on the development schedule of the E2 program.

We revise our 2016/2017 EPS estimates to $2.11/2.19 from $2.14/2.39 to reflect updated GS estimates for the USD/BRL exchange rate.

3Q Items of Focus: Regional jet campaigns; Pricing pressure in Commercial and Business Jet; Business jet market trends; E2 transition; Defense program contributions, KC-390 program and receivables update; FX.

TheStreet Said: TheStreet Ratings team rates EMBRAER SA as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

We rate EMBRAER SA (ERJ) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, disappointing return on equity and poor profit margins.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Net operating cash flow has significantly increased by 141.25% to $338.00 million when compared to the same quarter last year. In addition, EMBRAER SA has also vastly surpassed the industry average cash flow growth rate of 26.96%.
  • ERJ, with its decline in revenue, underperformed when compared the industry average of 5.1%. Since the same quarter one year prior, revenues fell by 14.1%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
  • Looking at the price performance of ERJ's shares over the past 12 months, there is not much good news to report: the stock is down 27.94%, and it has underformed the S&P 500 Index. In addition, the company's earnings per share are lower today than the year-earlier quarter. Despite the heavy decline in its share price, this stock is still more expensive (when compared to its current earnings) than most other companies in its industry.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. In comparison to the other companies in the Aerospace & Defense industry and the overall market, EMBRAER SA's return on equity is significantly below that of the industry average and is below that of the S&P 500.
  • You can view the full analysis from the report here: ERJ