2 Potential Aerospace and Defense Buyout Candidates

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The United States is a long way from being in the same trouble that Greece currently is in. However, lawmakers and economists alike realize that our ever-increasing debt burden is eventually going to haunt us if something isn't done soon.

This was the motive behind August's debt-ceiling raise, which was supposed to highlight a plan to cut $2.5 trillion in spending out of the federal budget over the next decade. Unfortunately, words often speak louder than actions in Washington, and a joint committee of Republicans and Democrats was unable to come up with a reasonable solution as to how to reduce spending. This inaction triggered sweeping spending cuts across a broad variety of sectors, with the defense and health-care sectors expected to be hit particularly hard.

What I figured I'd do today is take a look at two aerospace and defense stocks that could be seen as attractive buyout candidates. With spending in the sector expected to shrink, companies will be looking to get leaner, and these two consistently profitable businesses could attract the attention of a select few cash-rich juggernauts. I'll also name who I feel the potential suitor might be. Please keep in mind this is merely speculation on my part, and predicting a buyout is tricky business -- but I'll give it a shot.

Embraer (NYS: ERJ)
Brazil's Embraer is the world's third-largest plane manufacturer, and it just last week forecast that revenue would be up from 2011 because of strength in its defense segment. Embraer also projected its commercial plane deliveries would be flat to up 5% for the year. With the United States and Europe's economies stalling, international aerospace and defense companies focused on growth in BRIC countries are reaping the benefits.

Boeing (NYS: BA) is a company in particular with deep pockets that currently has a lot of interest in Brazil. It has for three years been attempting to win a sizable $4 billion contract to sell its F-18 fighters to Brazil while competing against France's Dassault Systemes and Sweden's Saab for the same contract. Purchasing Embraer seems like a logical step for Boeing to open up a new channel of international revenue while also diversifying its military operations. The price for Embraer could be steep, but the expected slowdown in military spending in the U.S. could be even steeper.

FLIR Systems (NAS: FLIR)
FLIR is a completely different story from Embraer. Whereas Embraer's business is blooming from growth in the emerging markets, FLIR appears to have peaked with 45% of its revenue reliant on U.S. government spending. In its latest reported quarter, revenue fell 7% and was highlighted by a 19% drop in sales of its surveillance products. This could be a case where management realizes there are few avenues to growth over the next few years and may opt to put the company's products into the hands of a more well-established company with deeper pockets.

I see two possible suitors for the struggling FLIR. Lockheed Martin (NYS: LMT) makes sense because the infrared and onboard technologies for each company are pretty similar. FLIR also has a long-term contract in place to provide thermal imaging equipment to the U.S. Coast Guard through a Lockheed Martin subsidiary.

Another outcome involves FLIR selling a solid chunk of itself to Garmin (Nasdq: GRMN) which is becoming increasingly desperate to find a way to grow sales. Back in 2010 FLIR outbid Garmin for a marine electronics GPS company called Raymarine. Effectively entering the marine GPS market as a competitor, Garmin has plenty of cash to make a bid for FLIR's marine business and then some. A buyout of this division would also give Garmin a practical monopoly on the marine GPS market and give FLIR some desperately needed cash to seek strategic buyouts of its own.

Foolish roundup
There you have it -- two companies you'd be prudent to keep on your radar in the aerospace and defense sector that could be attracting the attention of the Big Boys.

Which company do you think has the best chance of being purchased? Tell me in the comments section below, and consider adding these two stocks to your free and personalized watchlist.

Keep mind as well that even small companies in the aerospace and defense sector can be the next big thing. In our latest special report, "Too Small to Fail: 2 Small Caps the Government Won't Let Go Broke," our analysts break down why these two companies are set up for years of success. Find out their names for free for a limited time only!

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He would like to remind you that a broken clock is right at least twice a day. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Lockheed Martin. Motley Fool newsletter services have recommended buying shares of Embraer. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's free, but feels the truth is priceless.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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