Top U.S. Defense Stocks to Watch According to Jefferies Analysis

Investing.com -- The U.S. defense sector shows promising investment opportunities as international tensions and domestic funding initiatives like "Golden Dome" drive growth.

According to recent Jefferies analysis, certain defense contractors are particularly well-positioned to capitalize on these trends.

AeroVironment (NASDAQ:AVAV) and L3Harris Technologies (NYSE:LHX) stand out as the top performers in the sector, with strong quarterly results and positive growth trajectories. These companies benefit from increased defense spending and strategic positioning in key military technology segments.

Let’s examine the leading defense stocks according to Jefferies:

1. AeroVironment (AVAV)

AVAV demonstrated remarkable performance with Q2 FY2026 revenue up 147% year-over-year to $465 million, largely in line with consensus estimates of $468 million. This growth includes a $170 million contribution from the Space, Cyber & Directed Energy segment, primarily from BlueHalo. Adjusted earnings per share reached $0.83, exceeding consensus of $0.77, while adjusted EBITDA hit $67.5 million with a 14.4% margin.

The company maintains strong visibility with $1.1 billion in funded backlog and $3.1 billion unfunded. FY2026 guidance of $1.9-2.0 billion in revenue appears achievable, with analysts expecting the lower end to be raised given the company’s 82% visibility for the remainder of the year. AVAV’s bid pipeline remains active, with particular strength in uncrewed systems, loitering munitions, and laser communication terminals.

In a recent development, AeroVironment expanded its Switchblade loitering munition family with three new variants and unveiled a new autonomous VTOL drone with significantly increased flight time. The company also announced it will deploy its counter-drone system at Grand Forks Air Force Base.

2. L3Harris Technologies (LHX)

L3Harris showed solid Q3 performance with revenues up 4.7% (7.9% organic) to $5.54 billion despite headwinds from the sale of CAS in the IMS segment. Growth was led by Aerojet expanding 10.0% organically year-over-year, followed by IMS at 10% organic growth. The SAS segment grew 7.9%, while CS increased by 3.8%.

Segment operating margins decreased 60 basis points year-over-year to 15.2% in Q3, primarily due to IMS declining 180 basis points following the CAS divestiture. Jefferies forecasts adjusted EPS of $2.51, slightly below consensus of $2.59 due to higher assumed tax rates.

L3Harris maintains its 2025 revenue guidance of $21.75 billion and is targeting $23 billion for 2026, implying approximately 7% organic growth. The company’s free cash flow guidance remains at $2.65 billion, with stronger cash generation expected in the second half of the year.

The company is well-positioned to benefit from the "Golden Dome" initiative, with 10-20% of the initial $25 billion in funding potentially addressable across missile warning systems, resilient communications, and solid rocket motors through Aerojet. L3Harris has also accelerated its cost savings program, now expecting to achieve $1 billion in savings one year ahead of schedule.

L3Harris Technologies has secured several new contracts, including a U.S. Navy award worth up to $939.6 million for radio systems and a $24 million U.S. Army contract for command and control devices. The company also expanded its VAMPIRE counter-drone system with specialized variants for land, sea, and air operations.

These defense contractors demonstrate strong fundamentals amid increasing global defense spending, with particular strength in autonomous systems, space technologies, and advanced communications systems.

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