Defense Sector Brief Review: Aircraft Engines and Avionics Systems Lead the Charge

The 50% single-year increase in U.S. military spending recently claimed by U.S. President Donald Trump is likely to face significant resistance, since exceeding the defense budget cap requires 60 Senate votes, but Republicans hold only 53 seats. The budget reconciliation process only needs 51 votes but still faces fiscal gap issues. Without appropriate budget sources or balanced spending, it may not meet budget reconciliation criteria.

Still, objective factors support potential growth in military industries. Delays in the U.S. sixth-generation fighter project, aging naval vessels and aircraft carriers, and stagnant tonnage growth all point to a genuine need for military industrial upgrades.

Key Sectors to Watch in the Defense Industry

Drones are not the only focus of market attention.Among defense companies, Military Aircraft Engines offer the most significant opportunities. As a crown jewel of military manufacturing with high technological barriers, this sector supports three companies with a market capitalization of hundreds of billions: $GE Aerospace(GE)$   , Raytheon Technologies $RTX Corp(RTX)$  (subsidiary Pratt & Whitney), and $Rolls Royce Holdings plc(RYCEY)$   (separated from the luxury car brand in 1973). 

The aircraft engine sector may benefit from sixth-generation fighter development. While fifth-generation fighters achieved radar stealth mainly through aerodynamic design, engine exhaust heat remains a vulnerability. Sixth-generation fighters require structural engine improvements and new thermal management systems to address infrared exposure, potentially increasing engine value.

Avionics and Control Systems follow in importance, represented by companies like $L3Harris Technologies, Inc.(LHX)$   and $TransDigm(TDG)$   , with Raytheon Technologies also active in this field. Moomoo App data indicates relatively high gross margins for companies in this sector.

In contrast, while $Lockheed Martin (LMT.US)$ is the most renowned in the defense sector with the largest revenue, its profit margins as a prime contractor for numerous projects are not particularly high. Consequently, the market values LMT at less than 20 times PE, while engine and avionics system companies command higher valuation premiums.

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