Deutsche Bank's 4 Favorite Stocks In Aerospace & Defense

As a preview to the second quarter, Deutsche Bank analyst Myles Walton released a note dated July 8, in which he outlined his thoughts on the Aerospace & Defense sector, as well as his favorites within the space.

Sector
Walton began by noting that, after a "strong" performance last year, commercial aerospace stocks have take a "healthy" break, currently flat year-to-date on average. However, he expects this to change after a better second quarter earnings season and as well as heading into the Farnborough Air show.

As for defense, Walton is expecting most of the large-cap defense names to see a low-to-mid single-digit decline in its top-lines for both the second quarter and full-year 2014. He also said upside revisions to margin targets are the likely source for guidance changes. However, he warned these revisions would need to be significant to alleviate the Street's current discomfort with the sector.

Favorites - Commercial Aerospace

• Boeing BA - Walton is expecting Boeing's results to come in above consensus due to "solid" commercial deliveries and is looking for full-year 2014 guidance to get an "operational bump."

  Hexcel HXL - The underlying cause for Walton's bullish view on Hexcel is an expected 11 percent growth in revenue for the quarter and 30 percent incremental EBIT margin. Taking this into consideration, Walton says there is potential for Hexcel to come in $0.04 or seven percent above consensus EPS estimates.

• Embraer SA ERJ - Walton explained that export data from the Brazilian government suggest a six to seven percent rise in exports for the first half compared to a 13 to 14 percent decline implied in the first quarter. For fiscal 2014, Walton is $0.11 above the consensus EPS estimate of $2.47.

Favorites - Defense

• General Dynamics GD - Walton is just above consensus for General Dynamics ($1.77 vs. $1.76) and is looking for increased guidance for full-year 2014. For the second quarter, he is looking for the company's results to show the follow-on of resurgent repurchase activity and a build-out in defense backlog.