Deutsche Bank Recommends The Boeing Company, General Dynamics Corporation And Rockwell Collins, Inc.

As earning season slowly kicks in to gear, Myles Walton of Deutsche Bank previewed the Aerospace and Defense sector in a note to clients on Thursday.

Commercial aero stocks are down five percent year to date on average while defense stocks have risen 13 percent versus a five percent gain in the S&P 500, according to Walton.

Commercial stocks have “taken a pause” after last year's out-performance (51 percent versus 30 percent gain in the S&P 500) while defense stocks “continue to perform well.”

“We think the current breather being taken in commercial stocks is healthy, but will turn up post a better third quarter earnings season,” Walton wrote in his note. The analyst recommends buying shares of Boeing, (NYSE: BA) General Dynamics (NYSE: GD) and Rockwell Collins (NYSE: COL) heading in to the quarter.

Walton believes that commercial aerospace manufacturers will see double-digit year over year growth based on favorable data including IATA air traffic, and capacity and freight data hinting of improving conditions.

Walton expects most of the large-cap defense companies will demonstrate top-line growth in the third quarter and for the full fiscal year 2014. The analyst adds that the industry could benefit from an improved budget outlook, longer-term pension dynamics becoming “more well understood,” and shareholder-friendly cash deployments.

Earnings estimates

• Walton expects Boeing (Buy rated) will earn $2.05 in its third quarter results, seven cents above the consensus estimate.
• Walton expects General Dynamics (Buy rated) will earn $1.98 in its third quarter results, eight cents above the consensus estimate.
• Walton expects Rockwell Collins (Buy rated) will earn $1.29 in its third quarter results, two cents above the consensus estimate.