2 defense stocks downgraded at RBC today

RBC Capital downgraded shares of two defense stocks in separate notes Wednesday, citing lower organic growth and weaker commercial aero growth.

L3Harris Technologies (NYSE:LHX ) was cut to Sector Perform from Outperform with a price target of $240 a share. The firm said it sees lower organic growth for the company and a risk to the pace of its margin expansion.

"Our downgrade is based on expected slower organic growth (~3% implied in 2024) relative to its defense peers," said the firm. "We also believe that while the pace of improvement on cost saving and margin expansion initiatives will continue, the potential upside from EACs is limited, and upside to the pace of margin expansion is a risk."

Furthermore, they believe consensus estimates already reflect much of LHX's upside. "We see a path to hitting the 2026 targets, however, we see less benefit near term to the short cycle business," RBC concluded.

Meanwhile, Hexcel Corp . (NYSE:HXL ) was also lowered to Sector Perform from Outperform with a price target of $68 per share, down from $76.

"We can appreciate the stock is depressed coming out of the 2Q24 results, where the company lowered its 2024 guidance due to lower growth in the commercial aerospace market," said RBC. "However, we see continued risk to the pace of production increases at both Airbus and Boeing, which will limit the pace of growth into 2025."

They also noted that Hexcel has fewer WC options relative to peers.

"We are downgrading HXL on lower 2025 commercial aerospace growth," added the investment bank's analysts. "We believe supply chain pressures will continue to limit the pace of A350 rate increases, even now with the lower expectations from Airbus.

"The company continues to target a material step up in A350 rates in 2025 (which is where we could be wrong on our HXL thesis), but we have taken a more cautious view on the pace of production rate increases on both the A350 and the Boeing 787."

Source: Investing.com