Investing.com -- Canadian aerospace and diversified industrial stocks are gaining attention from investors as defense spending and consumer trends create tailwinds for the sector. According to a recent report by RBC Capital Markets analyst James McGarragle, several companies are well-positioned to benefit from these dynamics. The report highlights three top stock ideas for 2026 based on growth potential and valuation.
Defense spending represents a significant growth driver for the Canadian aerospace industry, with the Canadian government’s 2025 federal budget including an $82 billion boost to defense spending over five years. Additionally, strong consumer spending in high-end segments continues to fuel demand in business aviation.
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Here are RBC’s top picks:
1. Bombardier (TSX:BBD.B)
RBC rates Bombardier as Outperform with a price target of CAD 263.00, up from CAD 230.00 previously. Despite the stock’s impressive 130% gain year-to-date, analysts believe it remains a compelling opportunity. The company yields approximately 6% on consensus 2026 free cash flow, which RBC considers attractive. Strong demand is evidenced by a robust 1.3x book-to-bill ratio, positioning Bombardier to achieve the high end of its free cash flow guidance with solid backlog visibility into 2028. Increased defense spending could accelerate the company’s $1-1.5 billion defense revenue target initially set for 2030. RBC projects Bombardier can compound free cash flow at greater than a low-teen CAGR well into the 2030s, supported by services growth, defense contracts, and continued strong business jet demand.
In a recent development, Moody’s upgraded Bombardier’s corporate family rating to Ba3, citing the company’s progress in reducing financial leverage, increasing earnings, and generating strong free cash flow.
2. Air Canada (TSX:AC)
RBC maintains an Outperform rating on Air Canada with a price target of CAD 25.00. While 2026 is expected to be a transition year with margin pressures from aircraft delivery delays, updated labor agreements, and rising airport infrastructure costs, RBC sees a compelling long-term opportunity. The airline’s free cash flow is projected to significantly improve in 2028 and 2029, representing estimated FCF yields of approximately 30% and 50%, respectively. Air Canada’s ability to reallocate capacity effectively amid weaker transborder demand demonstrates management’s execution capabilities. Cost control initiatives, including projected savings of $150 million for 2025, should help offset unit cost pressures resulting from slower capacity growth.
Air Canada reported a 2% increase in revenue for its second quarter of 2025, reaching $5.6 billion, which was driven by growth in its premium and cargo segments.
3. Exchange Income Corporation (TSX:EIF)
RBC rates Exchange Income as Outperform with a price target of CAD 94.00. The diversified holding company has exposure to meaningful long-term secular tailwinds across its subsidiaries. While investors recognize the company’s defense and Arctic sovereignty investment exposure through PAL and Canadian North, RBC believes the market underappreciates Exchange’s significant exposure to infrastructure and housing investment—both key items in the recent Canadian budget. Northern Mat and the Windows segment are well-positioned to benefit from these investments. Management has provided 2026 EBITDA guidance of $825-875 million, representing mid-teen growth, which RBC views as impressive given the weak industrial backdrop.
Exchange Income Corporation announced third-quarter 2025 revenue of $960 million, which surpassed analyst forecasts, while its earnings per share of $1.46 was slightly below expectations.
These three companies represent RBC’s top ideas in the Canadian aerospace and diversified industrials sector heading into 2026, with each offering unique exposure to defense spending increases and consumer demand trends.
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