Aerospace has come a long way since the Wright brothers first took flight in 1903. Today, aerospace is a $300 billion global industry comprised of companies that make rockets, planes, drones, and other flying craft.
The aerospace industry is generally broken down into commercial and defense applications, although many of the largest companies serve both the airlines and the Pentagon.
Both the defense and commercial sides of the business are in a period of sustained growth, making this an intriguing time for investors to consider aerospace stocks. Russia's invasion of Ukraine has caused ripples around the globe and has the United States and its European allies investing in defense.
On the commercial side, a post-pandemic travel resurgence and a growing global middle class have companies anticipating a need for more than 39,000 new airplanes -- valued at more than $5.9 trillion -- over the next 20 years.
Combining commercial and defense, these companies are also among the space stocks pushing the envelope and ushering in a new era of commercial spaceflight.
4 best aerospace stocks
4 best aerospace stocks for 2024
| Company | Market Cap | Description |
|---|---|---|
| Lockheed Martin (NYSE:LMT) | $110.82 billion | Lockheed Martin is the world's largest defense contractor, with a heavy emphasis on aviation, missiles, and space. |
| Northrop Grumman (NYSE:NOC) | $70.85 billion | Northrop is the nation's go-to contractor for bombers and nuclear missiles. |
| TransDigm Group (NYSE:TDG) | $53.49 billion | This under-the-radar manufacturer of subsystems and parts has quietly been one of the top performing stocks in the sector. |
| Kratos Defense and Security Solutions (NASDAQ:KTOS) | $2.42 billion | The drone specialist is trying to change the way we think about an air force. |
Let's take a closer look at these standout companies.
1. Lockheed Martin
1. Lockheed Martin
Lockheed Martin (LMT -0.22%) works in many areas, including a large aerospace business. Lockheed is the supplier of the F-35 and F-22 -- the United States' two most advanced fighter jets -- and its Sikorsky unit is a major source of military and commercial helicopters.
Lockheed also has a large missile and missile defense business. And both as half-owner of United Launch Alliance and through its business building and maintaining satellites and space electronics systems, it has a growing business helping the Pentagon and civil agencies get to space.
2. Northrop Grumman
2. Northrop Grumman
Northrop Grumman (NOC 0.73%) is the company most closely tied to the U.S. nuclear triad: a combination of missiles, bombers, and submarines that serve as the nation's primary defense against a nuclear strike. The triad is the Pentagon's top priority. And Northrop's role in making the B-21 bomber and refreshing the Minuteman intercontinental ballistic missile guarantees it billions in future sales.
Additionally, Northrop's Orbital ATK unit is one of two major U.S. manufacturers of the rocket engines needed to get to space. The company also has a large satellite and electronics division that supports the nation's space efforts.
3. TransDigm Group
3. TransDigm Group
TransDigm Group (TDG 0.51%) operates somewhat like a private equity firm, identifying and acquiring hidden gems among the vast world of aerospace suppliers and growing those businesses once in-house. TransDigm is a holding company for an array of defense and commercial businesses, supplying components for new airframes and spare parts that keep the existing fleet running.
The formula has worked for investors, with TransDigm shares up more than 3,250% since its 2006 initial public offering (IPO). The company has a long track record of delivering software-like gross margins north of 40%, even during downturns. And it is set up well to benefit from the expanding military and commercial global fleets.
4. Kratos Defense and Security
4. Kratos Defense and Security
Kratos Defense and Security Solutions (KTOS 2.69%) is smaller than the other companies mentioned and much more focused. The company does have some defense electronics and space businesses, but the company is best known as a developer of drones and unmanned aerial vehicles (UAVs) for defense customers.
Kratos is a large supplier of "dumb" drones used by the military for target practice. However, its most promising products are small UAVs called "loyal wingman" drones that would be able to fly into battle alongside piloted aircraft.
If things go to plan, these drones could fundamentally change how air wars are fought, confusing air defense systems by providing them with an overwhelming number of targets and limiting the number of human pilots needed to fly in harm's way.
Risks to owning aerospace stocks
Risks to owning aerospace stocks
The outlook for aerospace is strong, but there are risks investors should consider. Historically, the sector has been cyclical. Defense stocks, for example, fell on hard times at the end of the Cold War, and commercial aerospace is closely tied to airline demand and can lag if the economy falters.
These airplanes and spacecraft require massive research and development spending, and each airframe comes with a huge price tag. Investors must be aware that mistakes can cost shareholders dearly and take years to fix.
One large company not on this list is Boeing (BA 1.53%), a huge commercial and defense aerospace vendor. Boeing's issues with the 737 MAX, coupled with the impact of the pandemic, caused the stock to lose more than half of its value since the start of 2020. Boeing appears now to be on the mend, but it will likely be the second half of this decade before the damage to its balance sheet is fully repaired.
For people unsure about committing to one stock, there is a range of defense exchange-traded funds that provide substantial exposure to aerospace. Given the size and scale of these companies, many of the major aerospace stocks are also represented in broader industrial ETFs.
Are aerospace stocks right for your portfolio?
The Boeing example is a reminder that risk can affect even the largest aerospace companies. But the industry is full of steady, diversified companies that rely on a stable customer -- the U.S. government -- with a 200-plus-year history of paying its bills.
Aerospace stocks can also benefit income-focused investors since the biggest companies are established dividend payers that tend to yield more than 2%. These companies also tend to be aggressive with share buybacks, putting excess cash to work for investors by reducing the number of shares outstanding.
Unfortunately, the world is growing smaller by the day but shows no signs of growing safer. There is a real and sustained need for updated versions of those flying machines pioneered by the Wright brothers a century ago.
Aerospace can be a slow and steady long-term option for investors who crave solid, predictable returns and want to tap into this massive global market opportunity.
