Trump Will Help Drive Aerojet Rocketdyne Higher
With President Donald Trump hitting the first 100 days of his command of the U.S. government, there is clearly a feeling that the defense sector will be a key segment to benefit from his policies. This should help drive up the value of defense stocks like Aerojet Rocketdyne Holdings Inc (NYSE:GY, NYSE:AJRD).
The small-cap defense play may not be that widely known by the investment community, but that doesn’t mean there isn’t an excellent opportunity here.
GY stock (AJRD stock) is outperforming the S&P 500 and Russell 2000 with a year-to-date move of 28%. The stock is well up from its $1.80 price in November 2008 and $5.69 in June 2012, but there is likely more to come under the direction of Trump.
When Trump ordered the strike of 59 “Tomahawk” cruise missiles into Syria, defense stocks like GY stock rallied. The same occurred when a massive 21,000 pound “mother of all bombs” (MOAB) was delivered to ISIS in Afghanistan.
You sense the pattern. The more missiles sent and bombs dropped, the better it is for the defense sector.
President Trump is asking for another $50.0 billion to add to the country’s massive military budget which, at over $600.0 billion, is more than the military budgets of the next eight countries combined. Spending by the U.S. military accounted for a whopping 36% of the world’s military spending in 2016.
In the case of Aerojet Rocketdyne, the more missiles sent, the better it will do. This is because the company produces the guts for the propulsion systems used to send missiles flying.
The company also makes rocket motors employed in advanced tactical and long-range weapon systems that use missiles. This includes launch propulsion, in-space propulsion, missile defense propulsion, tactical missile propulsion, and hypersonic propulsion systems.
For instance, the newly-installed “Terminal High Altitude Area Defense” (THAAD) weapon system in South Korea uses motors and the “Divert and Attitude Control System” (DACS) made by Aerojet Rocketdyne.
As long as the tailwinds for military spending rise under Trump, AJRD stock should fare well. The problem with the company has more to do with its failure to deliver what Wall Street wants to hear.
Over the past 16 quarters since 2013, Aerojet Rocketdyne has beaten the consensus earnings per share (EPS) in only four quarters, while falling short in 12 quarters.
If the company can correct this misfiring, it could drive up the GY stock price to record levels.
Aerojet Rocketdyne has recorded two straight years of sequential revenue growth—in 2015 and 2016—and is poised to ramp up revenues in 2017 and 2018.
A big plus is that the company turned profitable in 2016 after losses in 2014 and 2015. Aerojet Rocketdyne is estimated to drive earnings to as high as $1.00 per diluted share in 2017 and $1.15 per diluted share in 2018, up from $0.27 per diluted share in 2016. (Source: “Aerojet Rocketdyne Holdings, Inc. (AJRD),” Yahoo! Finance, last accessed April 27, 2017.)
AJRD Stock Could Target $30
A look at the weekly chart of AJRD stock shows the steady uptrend since the emergence of a bullish “V” bottom in January 2016, when the shares were trading at around $14.00.
Chart courtesy of StockCharts.com
The upside channel for GY stock was confirmed by stronger relative strength and an upward-trending moving average convergence/divergence (MACD).
A bullish signal was confirmed with a golden cross pattern in February 2017, at $18.24, when the 50-day moving average crossed above the 200-day moving average.
Chart courtesy of StockCharts.com
Aerojet Rocketdyne stock is positioned to go higher, and will face resistance at just above $24.00. A sustained break above that level could see AJRD stock move toward $30.00.