The big news recently was the August jobs report, which came in below expectations. The slack in the labor market spooked investors, and market watchers are now looking ahead to the next Fed meeting and an expected cut in major fund rates.
So, where does the stock market go from here? The overall trend of the past year remains bullish, and investors aren’t fleeing the market just yet. But the question remains: Where should investors put their money? A recent report from Morgan Stanley’s chief US equity strategist, Mike Wilson, suggests buying stocks that demonstrate a combination of defensive positions and overall quality.
“Until the bond market starts to believe that the Fed is no longer lagging (the spread between the 2-year yield and Fed funds narrows), growth rates turn around and improve materially, or additional policy stimulus is introduced, it will be difficult for equity markets to trade with a riskier tone, in our view,” Wilson said. “This means that valuations are likely to remain challenged for the overall index… In such an environment, quality + defensive stocks should continue to outperform.”
Morgan Stanley’s equity analysts are following suit, pointing to solid defensive plays that should catch investors’ attention going forward. We’ve used TipRanks’ database to look at the broader picture for two of these quality defensive stocks, so let’s dig into the details.
Johnson Controls (JCI)
We’ll start with Johnson Controls, perhaps not a household name, but a well-known player in the HVAC world. Johnson Controls is a Fortune 500 name, has a market cap of nearly $46 billion, and generated $26.8 billion in fiscal year 2023, its most recent full fiscal year. The company has built its success on the foundational need for the core service it provides: HVAC, fire suppression, and safety/security systems for commercial and office spaces.
Johnson Controls has been in business since 1885, when it was founded as an electrical services provider. The company’s longevity is a clear advantage: this is a company that knows how to adapt to changing times and can show investors a long track record. The company operates globally, in more than 150 countries, and employs approximately 100,000 people. Johnson is known for integrating the latest technologies into its ‘smart building systems’, including AI and machine learning, while still retaining the fundamentals of practical mechanical engineering.
Earlier this summer, Johnson Controls made a major move by announcing an agreement to sell its Residential and Light Commercial HVAC business. The buyer, Bosch, will acquire this segment from Johnson in a transaction valued at $8.1 billion; JCI’s total consideration will be $6.7 billion. The move will transform Johnson Controls into a pure-play provider of “comprehensive solutions for commercial buildings.”
Also in July of this year, Johnson Controls announced the upcoming retirement of CEO George Oliver after 7 years in the role. Oliver will remain at the helm until a replacement CEO is named and will remain Chairman of the Board.
Looking at the financial side, Johnson Controls reported $7.2 billion in revenue in its latest quarter, fiscal 3Q24. This figure was a modest 1% increase year over year, but missed estimates by $140 million. On the bottom line, the company reported non-GAAP earnings per share of $1.14, which beat estimates by 6 cents per share.
For Morgan Stanley analyst Chris Snyder, the key here is the company’s solid position in its niche and a solid outlook for the future. As he writes, “The JCI portfolio transformation presents an attractive risk/reward as the company is now a pureplay provider of commercial building solutions (HVAC, Controls, Fire & Safety) – resulting in a more sustainable business and providing a revaluation opportunity. We see a ~30% pro-forma service mix and greater exposure to industry megatrends (Data Center, US Reshoring) that pushes equity into a more premium comp group. While our calculations place pro-forma F’26 EPS L-MSD below existing businesses, this can be offset by relatively small costs (~4% of divested sales). What remains is largely unchanged EPS for a high-quality business, while JCI stock continues to trade at a 2-3 turn discount to its peer group.”
These comments support Snyder’s Overweight (Buy) rating on the stock, and his $85 price target suggests 24% upside potential over the coming year. (Click here to watch Snyder’s track record)
This stock has a Moderate Buy rating from the Street’s analysts, based on 13 reviews with 7 Buys and 6 Holds. The stock is priced at $68.60 and the $75.92 average price target implies almost 11% upside potential in one year. (See JCI Stock Forecast)
General Dynamics (GD)
The second company we’ll look at here is General Dynamics, an aerospace and technology manufacturing company – and one of the largest defense contractors in the U.S. economy. Founded in 1893, General Dynamics focused on developing submarines as the Holland Torpedo Boat Company; it delivered the Navy’s first modern submarines as early as 1900. It has gone from strength to strength ever since. It delivered 80 submarines to the U.S. Navy during World War II and expanded into the aerospace industry after the war. It changed its name to General Dynamics in 1952 and has since built a reputation as an innovator, having a hand in developing the F-111 attack aircraft and later developing and building the hugely successful F-16 fighter jet.
Today, General Dynamics operates through four business divisions: Aerospace, Marine Systems, Combat Systems, and Technologies. The company’s most notable products today come from its Marine Systems division, where the Bath Iron Works and Electric Boat segments produce the Navy’s Arleigh Burke-class destroyers and nuclear-powered submarines, respectively. In addition, the Aerospace division includes the famous Gulfstream jets.
General Dynamics has won several major contracts in recent months, demonstrating its continued relevance to the defense industry. It kicked off August by announcing a $174 million contract to retrofit, repair and support the U.S. Army’s Stryker vehicles, and followed that up later in the month with a $1.32 billion contract modification that will allow it to procure “long lead time” materials for the Virginia-class nuclear submarine program. And in early September, GD secured a $491 million modification to a contract with the Air Force for the Proliferated Warfighter Space Architecture Ground Management and Integration program, which is running in Huntsville, Alabama, and Grand Forks, North Dakota.
General Dynamics last reported earnings results for 2Q24, and in that quarter revenue came in at $12 billion — up 18% from the same period last year and $500 million more than expected. Net EPS of $3.26, while up more than 20% year over year, missed expectations by 7 cents per share.
On the balance sheet, General Dynamics ended the quarter with $1.4 billion in cash on hand — after paying $389 million in total dividends, buying back $34 million in stock and investing $201 million in capital expenditures. Looking ahead, the company has a backlog of $91.3 billion.
Kristine Liwag, one of Morgan Stanley’s 5-star analysts, covers the defense giant and in her coverage, she notes that the company has many strengths: “We see GD with a top-notch balance sheet and strong prospects for capital returns. A renewed lineup of new Gulfstream aircraft combined with strong demand for GD’s defense products (e.g., munitions, ground vehicles) together offer strong potential for earnings growth… We see GD entering a unique period of margin acceleration.”
To quantify her stance, Liwag rates GD shares as Overweight (Buy), and her $345 price target suggests there’s room for a 14.5% upside over the next 12 months. (Click here to watch Liwag’s track record)
This stock has been given a Strong Buy consensus rating by analysts, with the 16 recent recommendations split into 13 Buys and 3 Holds. The stock’s $301.56 trading price and $329.13 average price target together suggest a 9% upside by this time next year. (See GD Stock Forecast)
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Disclaimer: The opinions expressed in this article are solely those of the analysts mentioned. The content is for informational purposes only. It is very important to do your own analysis before making any investment.
