Astronics: Under-the-Radar Pentagon Play

04/04/2017 2:50 am EST

Focus: INDUSTRIALS

Here’s a little-known defense stock that’s getting short shrift from investors: Astronics (ATRO), a small-cap electronics firm that’s poised to outperform the mega-cap blue chips, asserts John Persinos, contributing  editor to Investing Daily's Personal Finance.

The company makes lighting and safety systems, aircraft structures and other avionic products for aerospace and defense industries around the world.

In addition, Astronics provides automatic test systems for communications and weapons platforms, as well as aircraft training and simulation devices.

A particularly hot segment within defense is ultra-sophisticated electronics gear, which is Astronics’ bread and butter. Not only are these products in great demand, but their complexity allows the company to charge a premium for them, which in turn boosts profits.

As with other defense stocks, Astronics will benefit from Trump’s aggressive foreign policy stance as well as his vows to rebuild the military and fill the Pentagon’s coffers.

One of the surest ways to make money as an investor is to tap unstoppable, long-term trends, and defense firms are riding the biggest growth wave of not only Trump’s presidency but of an entire generation.

Because of its diversification, Astronics also benefits from the global surge in commercial flights. The commercial aviation sector had several lean years after the Great Recession but is flying high now, especially in developing nations where rising middle classes are fueling the tourist industry.

With a trailing 12-month price-to-earnings ratio of about 21, Astronics trades at only a slight premium to the defense industry’s average trailing P/E of 18.3 and has a cheaper valuation than most defense giants.

The analyst consensus is for the company to post year-over-year earnings growth of 17.4% in fiscal 2017, 16.9% next year and an annualized 12.5% over the next five years. Buy up to $39 with a target price of $55.

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