Hot Picks: Aerospace and defence stocks gain momentum

Aerospace and defence stocks are drawing renewed interest as commercial aircraft demand strengthens and governments increase spending on missiles and military readiness. Analysts point to long-term growth drivers tied to aviation recovery, defence restocking and consolidation across the supply chain.

BNN Bloomberg spoke with Ken Herbert, an analyst at RBC Capital Markets, about his aerospace and defence stock picks, highlighting exposure to aircraft engines, missile systems and companies positioned to benefit from defence spending and aftermarket growth.

Key Takeaways

• Aircraft engine production and aftermarket services remain key growth drivers as global air travel continues to recover.
• Missile manufacturing and replenishment are becoming long-term priorities amid rising defence budgets and geopolitical tensions.
• Diversified aerospace firms benefit from a balance of commercial aviation and defence exposure.
• Valuations in parts of the aerospace sector remain attractive relative to broader equity benchmarks.
• Industry consolidation and acquisitions are expected to support growth, particularly among smaller suppliers.

Read the full transcript below:

ANDREW: Time for Hot Picks. Our guest has French aerospace and defence company Safran as his top selection. We’re joined by Ken Herbert, analyst at RBC Capital Markets. Thanks very much for joining us. I was just checking Safran’s website — they’re certainly diversified, from drones and missile guidance systems to body armour.

KEN: Thanks, Andrew. It’s important to keep in mind that for Safran, approximately 80 per cent of its sales are commercial aerospace. It is a leader in aircraft engines and the services associated with them. It is also expecting to see a doubling of its equipment defence sales in Europe, which we think gives investors good exposure to European defence spending. While it has a broad portfolio, it remains very commercially focused, where we are very bullish on the fundamental outlook for both new aircraft builds and the aerospace aftermarket.

ANDREW: That’s interesting. What kind of civil aviation engines does it make?

KEN: Safran is part of a 50-50 joint venture in CFM International, which predominantly provides narrowbody engines. These power about 60 per cent of the Airbus A320neo fleet and essentially 100 per cent of the Boeing 737 Max fleet. It also produces parts for widebody engines, as well as a range of business jet and military engines and propulsion systems for helicopters and aircraft. But on the commercial side, narrowbody engines are what it is best known for.

ANDREW: RTX — a big missile maker that used to be Raytheon. What attracts you to that stock?

KEN: We really like the mix at RTX, which is about 50 per cent commercial and 50 per cent defence. Within its defence business, its book-to-bill was over two times in the most recent quarter. It is the number one supplier of missiles in the United States. When you think about major new program starts like Golden Dome, as well as missile restocking efforts in the U.S., RTX is a direct beneficiary. It also has significant international exposure through products like the Patriot missile. We think it is well positioned for defence market growth, while also offering meaningful commercial exposure, which we like given our view that growth continues in the sector into 2026.

ANDREW: So it also has a civil aviation franchise.

KEN: It does. RTX owns Pratt & Whitney, which makes several civil aircraft engines. It also owns Collins Aerospace. Along with Raytheon, those are its three main segments. Collins is a diversified supplier of aerospace products, from seating and interior equipment to avionics and systems. While it is diversified, we see the most upside in the defence segment into 2026.

ANDREW: Finally, tell us about Loar. What does it do?

KEN: Loar is a small component supplier, with about 70 per cent of its revenue tied to commercial aerospace. It supplies products such as seat belts and other aircraft systems, with most of its exposure in the aftermarket. About 25 per cent of its revenue comes from business jets. It has also benefited from new product introductions, which have allowed it to outgrow peers. Importantly, it offers exposure to what we expect to be continued consolidation in the aerospace market. The company has announced a significant acquisition that we expect to close in the near term, and we believe future acquisitions could help reverse the stock’s sideways performance over the past six months.

ANDREW: More generally, have U.S. defence stocks been good investments over time? Are they cyclical, or do they rise and fall with political winds?

KEN: They have tended to be cyclical. In some ways, they can be countercyclical to the broader economy. We often say defence stocks are defensive. Even with the substantial growth we’re seeing in defence spending in the U.S. and internationally, the sector will remain cyclical. Competitive pressures and political factors continue to influence sentiment, but we like the fundamental outlook for global defence spending right now.

ANDREW: A name that always comes up in defence is General Dynamics, the maker of Abrams tanks and other systems. That stock has had a strong run over the past decade.

KEN: General Dynamics is also well known for its Gulfstream business jet franchise. We’ve seen some pickup in business jet demand in 2025, which we expect to continue into 2026. Gulfstream is very well positioned at the high end of the market, particularly for corporate travel and high-net-worth individuals. The company also has strong franchises in shipbuilding and combat systems, which are well positioned given current defence spending trends.

ANDREW: Would you be a buyer of General Dynamics right now?

KEN: We’re less keen on General Dynamics at the moment. We have a sector perform rating and prefer RTX for prime defence exposure.

ANDREW: Ken, thank you very much. Really appreciate it.

KEN: Thanks, Andrew. Happy holidays.

ANDREW: You too. That’s Ken Herbert, analyst at RBC Capital Markets.

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This BNN Bloomberg summary and transcript of the Dec. 19, 2025 interview with Ken Herbert are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.