5 Picks for 2012 in Aerospace, Defense

NEW YORK (TheStreet) - The global aerospace and defense sector is seen having a stable 2012 outlook, as per the estimates of Fitch Ratings. For the commercial segment, the rating company projects deliveries from Boeing (BA) to increase by almost 15% in 2012, contributing to 20% revenue growth. Further ahead, it projects a 9% growth in deliveries in 2013.

Based on average estimates of analysts polled by Bloomberg, these five stocks have potential upsides ranging from 12% to 24%, with average buy and average hold ratings of 67% and 29%, respectively.

These stocks are listed in ascending order of upside potential.

5. The Boeing Company ( BA), builds and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight technology and launch systems and services. The company also provides numerous military and commercial airline support services.

For the third quarter of fiscal year 2011, Boeing reported revenue of $17.72 billion, up 4%, compared to the third quarter of 2010, and backlog grew 2.8% sequentially to $332 billion, which includes $26 billion in orders during the third quarter alone.

Boeing recorded third quarter net income of $1.1 billion or $1.46 per diluted share, up 31% compared to net income of $837 million or $1.12 per diluted share during the third quarter of 2010.

For the year 2011 Boeing has increased its earnings per share guidance in the range $4.30 to $4.40 per share.

In December 2011, FedEx ( FDX) signed an agreement with Boeing to purchase 27 new 767-300F aircraft, with three arriving in fiscal 2014 and six per year in fiscal 2015 through 2018. Furthermore, the company declared a quarterly dividend of 44 cents per share, an increase of 5% from the previous regular quarterly dividend, payable March 2.

Of the 33 analysts covering the stock, 76% recommend a buy and 21% suggest a hold. The stock's average 12-month price target is $81.95, or 11.7% above the current price, according to a Bloomberg consensus.

4. General Dynamics ( GD) is a defense industry builder of planes, ships and information and support technology.

For the third quarter 2011, the company reported earnings from continuing operations of $665 million, or $1.83 per share, up 2.5% compared to 2010 third-quarter. Operating earnings were $998 million, an increase of 3.3%. Total backlog, which includes both funded and unfunded orders, grew by 2.5% sequentially, to $58.5 billion.

In December 2011, the company declared a quarterly dividend of 47 cents per share, compared to 42 cents paid in the year ago quarter, payable Feb. 10.

Fitch Ratings affirmed the "A" long-term and "F1" short-term issuer default rating and debt ratings for General Dynamics with a stable rating outlook.

In December 2011, GD completed the acquisition of Force Protection, a provider of blast- and ballistic-protected platforms that support the armed forces of the U.S. and its allies. In addition, the company announced that the U.S. Army TACOM Life Cycle Management Command has awarded a $126 million contract modification to General Dynamics Land Systems-Canada.

Of the 26 analysts covering the stock, 69% recommend a buy and 27% suggest a hold. The stock's average 12-month price target is $76.67, or 15.4% above the current price, according to a Bloomberg consensus.

3. Honeywell International ( HON) is a Fortune 100 diversified technology and manufacturing leader, serving customers worldwide with aerospace products and services; control technologies for buildings, homes, and industry; automotive products; turbochargers; and specialty materials.

For third quarter 2011, the company recorded sales of $9.3 billion, up 14% compared to the same period 2010. The earnings stood at $1.10 per share, an increase of 45%.

For fiscal 2011, HON estimates sales in the range of $36.5 billion to 36.7 billion, up 13% over 2010, and earnings per share in the range of $4.00 to 4.05, up 33% to 35% over 2010.

For fiscal 2012, it expects sales to be in the range of $37.8 billion to $38.9 billion and EPS in the range of $4.25 to $4.50.

In December 2011, HON announced that it has awarded a 15-year contract to completely overhaul the technology controlling the massive wastewater treatment system in Los Angeles for almost $88.6 million.

Of the 25 analysts covering the stock, 72% recommend a buy and 28% suggest a hold. The stock's average 12-month price target is $63.00, or 15.9% above the current price, according to a Bloomberg consensus.

2. Hexcel ( HXL), is a maker of lightweight, high-performance structural materials used in commercial aerospace, space and defense and industrial applications such as wind turbine blades.

For the third quarter of 2011, the company recorded sales of $351.8 million, up 19.5% compared to the same period last year. Net income for quarter was $32.2 million, or $0.32 diluted earnings per share, up 106%.

During the quarter, commercial aerospace sales increased by 31.6% and adjusted operating margin stood at 13.8%.

For the fiscal 2012, HXL expects revenue to grow in a range of $1.5 billion to $1.6 billion and diluted earnings per share to be in the range of $1.33 to $1.45.

Of the 16 analysts covering the stock, 56% recommend a buy and 31% suggest a hold. The stock's average 12-month price target is $29.41, or 21.5% above the current price, according to a Bloomberg consensus.

1. Based in Israel, Elbit Systems ( ESLT) is an international defense electronics company and a maker of drone aircraft.

For the third quarter of fiscal 2011, ESLT recorded revenues of $663.7 million, up 2.12% from the third quarter of 2010. Operating income for the quarter increased to $56.2 million from $52.4 million in the third quarter of 2010. GAAP Net income for the quarter stood at $36.5 million or 85 cents per diluted share. Non-GAAP net income per diluted share increased to $1.31 from $1.25 in the year ago quarter.

For the sixth consecutive quarter, the company's backlog of orders at the end of third quarter 2011 increased 5.8% year-over-year to $5,691 million. Almost 75% of the orders relate to orders from outside of Israel.

This week, ESLT announced that it was awarded a contract, valued at approximately $50 million, to supply Hermes 900 Unmanned Aircraft Systems to a governmental office of a country in the Americas.

Of the 11 analysts covering the stock, 64% recommend a buy and rest suggest a hold. The stock's average 12-month price target is $50.74, or 24% above the current price, according to a Bloomberg consensus.

>>To see these stocks in action, visit the 5 Picks for 2012 in Aerospace, Defense portfolio on Stockpickr.

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