Several nations are raising their defense budgets due to escalating geopolitical tensions. Also, this sector is undergoing technological advancements. These factors should bode well for defense stocks.
Given the industry’s immense growth prospects, it could be wise to buy fundamentally strong air defense stocks BAE Systems plc (BAESY), Textron Inc. (TXT), Cadre Holdings, Inc. (CDRE), and CPI Aerostructures, Inc. (CVU).
Before diving deeper into their fundamentals, let’s discuss what’s happening in the air defense industry.
Ukraine’s war with Russia has put the onus on countries to fortify their military and air defense capabilities. In 2022, global military expenditures experienced a 3.7% increase, reaching $2.24 trillion.
The U.S. defense spending is expected to be $886 billion in 2023. Moreover, the Department of Air Force requested a budget increase of 11.7% year-over-year to $194 billion.
Furthermore, technological breakthroughs are increasing the efficacy of missile and air defense systems. The integration of radar systems, artificial intelligence, and analytics has expedited threat identification and interception, fundamentally reshaping the landscape of modern warfare and propelling the sector's growth trajectory.
The aerospace and defense market is expected to grow at a CAGR of 5.9% to reach $1.08 trillion by 2027.
Let’s take a closer look at the fundamentals of the featured stocks.
BAE Systems plc (BAESY)
Based in Farnborough, the United Kingdom, BAESY provides defense, aerospace, and security solutions worldwide. The company operates through five segments: Electronic Systems, Cyber & Intelligence, Platforms & Services (US), Air, and Maritime.
On August 17, 2023, BAE Systems announced that it agreed to acquire Ball Corporation's Ball Aerospace business. BAESY’s Chief Executive Charles Woodburn said, “The proposed acquisition of Ball Aerospace is a unique opportunity to add a high quality, fast-growing technology business with significant capabilities to our core business performing strongly and well positioned for sustained growth.
“The strategic and financial rationale is compelling, as we continue to focus on areas of high priority defence and Intelligence spending, strengthening our world-class multi-domain portfolio and enhancing our value compounding model of top-line growth, margin expansion, and high cash generation,” he added.
In terms of the trailing-12-month gross profit margin, BAESY’s 63.12% is 108.1% higher than the 30.33% industry average. Likewise, its 8.62% trailing-12-month net income margin is 39.2% higher than the 6.19% industry average. Furthermore, its 11.17% trailing-12-month levered FCF margin is 104.4% higher than the 5.46% industry average.
BAESY’s sales for six months that ended June 30, 2023, increased 13.6% year-over-year to £12.02 billion ($15.30 billion). Its underlying EBIT rose 13.1% year-over-year to £1.26 billion ($1.60 billion). Its operating profit increased 19.9% year-over-year to £1.23 billion ($1.57 billion). The company’s profit for the period increased 55.3% year-over-year to £1.01 billion ($1.29 billion).
Additionally, the company’s EPS increased 62.2% year-over-year to 31.8p. Also, its net cash flow from operating activities increased 201% year-over-year to £1.48 billion ($1.88 billion).
Analysts expect BAESY’s EPS and revenue for fiscal 2023 to increase 19.9% and 12.6% year-over-year to $3.20 and $31.47 billion, respectively. Over the past nine months, the stock has gained 35.6% to close the last trading session at $49.93.
BAESY’s POWR Ratings reflect strong prospects. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Stability and a B for Value and Momentum. It is ranked #2 out of 71 stocks in the Air/Defense Services industry. To see BAESY’s Growth, Sentiment, and Quality ratings, click here.
Textron Inc. (TXT)
TXT operates in the aircraft, defense, industrial, and finance businesses worldwide. It operates through six segments: Textron Aviation, Bell, Textron Systems, Industrial, Textron eAviation, and Finance.
On May 31, 2023, Bell Textron Canada Ltd., a TXT company, announced a purchase agreement for six Bell 407GXi helicopters. The Argentinean Air Force and Army will use the helicopters for Search and Rescue Missions. The Ministry of Defense of Argentina and the Canadian Commercial Corporation established the contract.
The Bell 407GXi's reliability and performance, particularly in high-altitude environments, make it well-suited for Argentina's mountainous terrain. The helicopters come with advanced features such as the Garmin G1000H NXi Flight Deck, enhancing situational awareness and enabling all-weather operations.
In terms of the trailing-12-month levered FCF margin, TXT’s 7.92% is 45% higher than the 5.46% industry average. Likewise, its 6.88% trailing-12-month net income margin is 11% higher than the 6.19% industry average. Furthermore, its 5.49% trailing-12-month Return on Total Assets is 8% higher than the 5.08% industry average.
For the second quarter that ended July 1, 2023, TXT’s total revenues increased 8.6% year-over-year to $3.42 billion. Its adjusted income from continuing operations rose 23.3% over the prior-year quarter to $296 million. Its adjusted EPS from continuing operations came in at $1.46, representing an increase of 31.5% year-over-year.
Street expects TXT’s EPS and revenue for the quarter ending September 30, 2023, to increase 22.6% and 12.7% year-over-year to $1.30 and $3.47 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 15.3% to close the last trading session at $75.25.
TXT’s solid prospects are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It is ranked #5 in the Air/Defense Services industry. It has a B grade for Growth, Value, Momentum, and Quality. In addition to the POWR Rating grades I’ve just highlighted, you can see TXT’s ratings for Stability and Sentiment here.
Cadre Holdings, Inc. (CDRE)
CDRE manufactures and distributes safety and survivability equipment that protects users in hazardous or life-threatening situations. The company operates in two segments, Products and Distribution.
In terms of the trailing-12-month EBIT margin, CDRE’s 12.49% is 28.1% higher than the 9.75% industry average. Likewise, its 10.05% trailing-12-month levered FCF margin is 84% higher than the 5.46% industry average. Furthermore, its 1.22x trailing-12-month asset turnover ratio is 50.4% higher than the 0.81x industry average.
CDRE’s net sales for the second quarter ended June 30, 2023, increased 2.4% year-over-year to $121.09 million. Its gross profit rose 17.4% year-over-year to $50.75 million. The company’s net income increased 147.3% year-over-year to $10.99 million.
Additionally, its EPS came in at $0.29, representing an increase of 141.7% year-over-year. Also, its adjusted EBITDA increased 24% year-over-year to $22.81 million.
For the quarter ending December 31, 2023, CDRE’s EPS is expected to increase 43.4% year-over-year to $0.27. Its revenue for the quarter ending September 30, 2023, is expected to increase 6% year-over-year to $118.21 million. It surpassed the consensus EPS estimates in three of the trailing four quarters. The stock has gained 21.4% year-to-date to close the last trading session at $24.45.
CDRE’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
It has a B grade for Growth, Momentum, Stability, Sentiment, and Quality. It is ranked first in the Air/Defense Services industry. In total, we rate CDRE on eight different levels. Beyond what we stated above, we also have given CDRE grades for Value. Get all the CDRE’s ratings here.
CPI Aerostructures, Inc. (CVU)
CVU engages in the contract production of structural aircraft parts for fixed-wing aircraft and helicopters in the commercial and defense markets.
On May 2, 2023, CVU announced that it received new purchase orders worth $7.1 million under a U.S. Air Force contract valued at up to $65.7 million. This contract involves providing modification kits and services for the T-38C Pacer Classic III Fuselage Structural Modification Kit Integration program ("PCIII") and Talon Repair Inspection and Maintenance ("TRIM") program.
The total funded contract value now stands at $38.7 million, with work extending into 2027. The project aims to enhance the durability of the Northrop T-38 supersonic jet trainer beyond 2030.
In terms of the trailing-12-month net income margin, CVU’s 11.96% is 93.1% higher than the 6.19% industry average. Likewise, its 16.36% trailing-12-month Return on Total Assets is 222% higher than the 5.08% industry average. Furthermore, its 1.49x trailing-12-month asset turnover ratio is 84% higher than the 0.81x industry average.
CVU’s revenue for the first quarter that ended March 31, 2023, increased 9.3% year-over-year to $22.02 million. The company’s gross profit increased 35.8% year-over-year to $4.66 million. Its net income came in at $983.31 thousand, compared to a net loss of $32.93 thousand in the year-ago period. Additionally, its income per share came in at $0.08.
Over the past nine months, the stock has gained 50.6% to close the last trading session at $3.69.
It’s no surprise that CVU has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and Value and a B for Momentum and Sentiment. It is ranked #3 in the same industry. Click here to see the additional POWR Ratings for CVU (Stability and Quality).
What To Do Next?
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BAESY shares were trading at $49.99 per share on Monday afternoon, up $0.06 (+0.12%). Year-to-date, BAESY has gained 20.47%, versus a 15.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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