BNP Paribas Exane initiated coverage on 12 U.S. aerospace and defense companies on Wednesday, advocating selective investments amid tougher year-over-year pressures in commercial aviation and anticipated accelerated defense spending growth by 2026. The bank favors suppliers and defense-focused contractors over large commercial OEMs, citing stronger upside potential.

Senior analyst Matthew Akers noted that while the sector previously benefited from robust order-to-shipment momentum, certain growth drivers may not repeat. In commercial aviation, Exane prefers parts and subsystems suppliers, issuing positive ratings on Raytheon (RTX.US), TransDigm (TDG.US), and AeroVironment (AVAV.US), while initiating coverage on Boeing (BA.US) and GE Aerospace (GE.US) with negative outlooks.

For defense, the team expects the 2026 U.S. budget resolution to unlock demand, listing Lockheed Martin (LMT.US), Northrop Grumman (NOC.US), and AeroVironment (AVAV.US) as top picks. Key rating highlights include:

**AeroVironment (AVAV.US): Outperform** Exane highlights its central role in U.S. DoD priorities, spanning small drones, counter-drone systems, and space tech. Surging demand for loitering munitions and tactical UAVs in recent conflicts is expected to drive mid-teens growth for its AxS segment. The BlueHalo acquisition expands its portfolio into laser communications, EW, RF satcom, and space electronics. The bank values the stock at 7.4x FY2027 revenue, justified by growth prospects.

**TransDigm (TDG.US): Outperform** Analysts expect the aerospace parts maker to exceed conservative margin forecasts for 2026–2027. Exane dismisses concerns over its "acquisition-driven model losing steam," citing ample room for M&A and capital returns. A $100 special dividend is projected next year, with potential returns rising to ~65% under optimistic M&A scenarios.

**Raytheon (RTX.US): Outperform** Supply chain easing is expected to boost Collins Aerospace’s output, improving OEM sales. Pratt & Whitney’s GTF engine fleet maturation and extended V2500 service life add momentum, while defense margins may rise as key programs enter mass production.

**GE Aerospace (GE.US): Underperform** Exane cautions that aftermarket optimization tailwinds are fading. LEAP engine learning-curve gains may slow, and GE9X losses could widen with Boeing’s 777X ramp-up. Post-warranty aftermarket revenue growth is projected to weaken later this decade.

**L3Harris (LHX.US): Neutral** Limited valuation upside is seen post-sharp rallies, though missile defense and Aerojet Rocketdyne offer growth.

**Boeing (BA.US): Underperform** Operational improvements under CEO Calhoun are noted, but aircraft output and cash flow expectations appear overly optimistic. Slowing air travel growth and expiring tariff-driven orders may pressure order-to-shipment ratios, with debt consuming most FCF.

**Lockheed Martin (LMT.US): Outperform** Missile programs (e.g., Golden Dome) and international demand are key drivers. Vulcan rocket launches (including Amazon’s Kuiper) should boost space profitability, while F-35 concerns are priced in.

**Kratos (KTOS.US): Neutral** Broad defense tech exposure is offset by rich valuations post-rally.

**General Dynamics (GD.US): Outperform** Gulfstream’s new models, submarine projects, and maritime sector tailwinds are catalysts.

**Northrop Grumman (NOC.US): Outperform** B-21 costs are peaking, with missile defense and classified space programs poised for margin expansion.

**Howmet (HWM.US): Outperform** Premium valuation is supported by pricing power, market share gains, and non-aerospace growth.

**Heico (HEI.US): Neutral** PMA market leadership remains, but high leverage and valuations warrant caution.