The air defense industry’s significant growth is fueled by rising geopolitical tensions worldwide, rapid advancements in technology, and military modernization efforts. Thus, it could be wise to invest in fundamentally sound air defense stocks OSI Systems, Inc. (OSIS), SoundThinking, Inc. (SSTI), Moog, Inc. (MOG.A), and Textron Inc. (TXT) for solid returns.
In recent years, the defense budget worldwide has spiked owing to alarming situations like the outbreak of the Russia-Ukraine war in 2022, increasing tensions in the South China Sea, and ongoing conflict in the Middle East. In 2022, the U.S. led the ranking of countries with the highest military spending, with $877 billion.
For 2024, a staggering defense budget has been approved by the U.S. Congress of $886 billion. The budget covers different aspects, including the military aid program to Ukraine, a five-percent pay hike to military personnel, and a controversial overseas electronic surveillance system widely used by the U.S. intelligence services.
Moreover, the Department of the Air Force fiscal year 2024 budget request of about $215.10 billion represents a 4.5% increase from the fiscal year 2023 enacted position, showcasing the Department’s commitment to making the investments needed to implement the National Defense Strategy.
The Department is likely to continue its heavy investment in advanced capabilities supporting integrated deterrence, ensuring that the collective systems provide an advantage over any potential adversaries’ collective means.
Thus, rising geopolitical instability is anticipated to keep the aerospace and defense (A&D) industry demand high this year, like in 2023. Also, as the A&D companies move toward digitalization and adopt emerging technologies, their chances of combatting probable challenges and increasing profitability become stronger.
Technological advancements, such as sensors, radar systems, missile technologies, and data processing capabilities, are driving growth in the air defense industry. Advanced technologies like artificial intelligence (AI), machine learning, and autonomous systems are being integrated into air defense systems to enhance their effectiveness.
According to the IMARC Group, the global air defense systems market reached $47.20 Billion in 2023. In addition, the market is expected to reach $70.50 billion by 2032, exhibiting a CAGR of 4.4% during the forecast period (2024-2032).
With these encouraging trends in mind, let’s delve into the fundamentals of the four best Air/Defence Services stock picks, beginning with the fourth choice.
Stock #4: OSI Systems, Inc. (OSIS)
OSIS designs and manufactures electronic systems and components. The company operates in three segments: Security; Healthcare; and Optoelectronics and Manufacturing. It offers baggage and parcel inspection, cargo and vehicle inspection, hold baggage and people screening, radiation monitoring, and explosive and narcotics trace detection systems.
On March 7, 2024, OSIS was awarded a $16 million contract by an international airport to enhance its checkpoint security infrastructure. The checkpoint lane upgrade includes supplying advanced 920CT screening systems integrated with automated tray return systems (TRS) lanes to streamline security operations.
OSI Systems’ Chairman and CEO, Deepak Chopra, stated, “This award signifies another milestone in our ongoing commitment to delivering advanced security solutions to this customer. Adding our TRS lanes is expected to enhance throughput further, providing a smoother and more efficient passenger screening process.”
On March 4, OSIS was awarded another contract for about $27 million to provide Itemiser® 5X explosive trace detection (ETD) systems for secondary screening of passengers and carry-on baggage at airport checkpoints along with related consumables to a leading European airport.
Also, on January 11, OSIS’ security division received an order for $4 million from a leading global air cargo logistics provider to offer advanced security inspection systems, including the Rapiscan® RTT®110 CT-based explosive detection system, the Rapiscan Orion® 927DX and 935DX for package screening, and the Rapiscan Orion 920CX for small parcel screening.
OSIS’ revenue has grown at a CAGR of 7.5% over the past three years. The company’s EBIT has increased 11.3% over the same timeframe, while its net income and EPS have improved at CAGRs of 12.8% and 24.3%, respectively.
For the fiscal 2024 second quarter that ended December 31, 2023, OSIS’ total net revenue increased 26.3% year-over-year to $373.23 million. Its non-GAAP operating income grew 84.1% from the year-ago value to $58.03 million. Its non-GAAP net income and non-GAAP EPS came in at $38.25 million and $2.21, up 87.7% and 85.7% year-over-year, respectively.
As of December 31, 2023, the company’s cash and cash equivalents were $127.26 million, compared to $76.75 million as of June 30, 2023.
Analysts expect OSIS’ revenue for the third quarter (ending March 2024) to increase 32.7% year-over-year to $401.99 million. The company’s EPS for the same period is expected to grow 41.3% year-over-year to $2.11. Furthermore, the company has surpassed the consensus EPS estimates in all four trailing quarters.
Shares of OSIS have surged 6.1% over the past six months and 40% over the past year to close the last trading session at $132.52.
OSIS’ POWR Ratings reflect its robust outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
OSIS has a B grade for Growth and Sentiment. It is ranked #16 out of 72 stocks in the Air/Defense Services industry.
In addition to the POWR Ratings we’ve stated above, we also have OSIS ratings for Momentum, Quality, Value, and Stability. Get all OSIS ratings here.
Stock #3: SoundThinking, Inc. (SSTI)
SSTI is a public safety tech company that offers transformative solutions and strategic advisory services for law enforcement and civic leadership. It offers the SafetySmart Platform, an integrated suite of data-driven tools that enables law enforcement and community violence prevention and health organizations. It offers ShotSpotter, CrimeTracer, and CaseBuilder.
On December 14, 2023, SSTI expanded into the Latin American market with the launch of Shotspotter, its industry-leading acoustic gunshot detection system. ShotSpotter was integrated with existing technologies in Montevideo that help police respond more effectively to gun violence, including video cameras and the city’s computer-aided dispatch (CAD) system.
On September 14, SSTI launched ShotCast™, a ready-for-broadcast multimedia video file to function in conjunction with ShotSpotter technology. Created for Public Information Officers and news media, ShotCast can effectively help inform the public, enhance awareness about the impact of gun violence, and promote community engagement in public safety.
On August 18, SSTI acquired SafePointe, LLC, an innovator in intelligent weapons detection technology. The acquisition enabled SSTI to enter into the underpenetrated and growing $20 billion global weapons detection market. Further, SafePointe empowered SSTI’s safetysmart™ platform with a proven AI-based low profile, frictionless weapons detection solution.
SSTI’s revenue has grown at a CAGR of 26.6% over the past three years. The company’s total assets have increased 27.8% over the same period, and its levered free cash flow has improved at a CAGR of 20.7%.
During the fourth quarter that ended December 31, 2023, SSTI’s revenues increased 24% year-over-year to $26.04 million. The company’s gross profit grew 26% from the prior year’s quarter to $15.01 million. Its net income came in at $3.64 million, or $0.28 per share, against a net loss of $1.04 million, or $0.09 per share, in the previous year’s quarter, respectively.
In addition, the company’s adjusted EBITDA for the quarter was $4.79 million, up 11.4% year-over-year. Its total assets stood at $138.51 million as of December 31, 2023, compared to total assets as of December 31, 2022, at $122.75 million.
As per its full-year 2024 guidance, SSTI expects its revenue to range from $104 million to $106 million, representing 13% year-over-year growth at the midpoint. Also, the company expects adjusted EBITDA margins of 18% to 20% for the full year 2024.
Street expects SSTI’s revenue for the first quarter (ending March 2024) to increase 21.8% year-over-year to $25.12 million. Further, for the fiscal year 2024, the company’s revenue is expected to grow 13.2% year-over-year to $104.97 million.
SSTI’s stock has declined 18.6% over the past month to close the last trading session at $16.42.
SSTI’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
SSTI has a B grade for Growth and Quality. Within the Air/Defense Services industry, SSTI is ranked #11 out of 72 stocks.
In addition to the POWR Ratings stated above, one can access SSTI’s ratings for Stability, Sentiment, Value, and Momentum here.
Stock #2: Moog, Inc. (MOG.A)
MOG.A designs, manufactures, and integrates precision motion and fluid controls and controls systems for original equipment manufacturers (OEMs) and end users in the aerospace, defense, and industrial markets worldwide. The company operates through Aircraft Controls; Space and Defense Controls; and Industrial Systems segments.
On January 26, MOG.A declared a quarterly dividend of $0.28 per share of Class A and Class B common stock, representing a 4% increase over the previous quarter’s dividend. The dividend was paid on February 27, 2024, to all shareholders of record on February 9, 2024. The dividend represents a use of cash of approximately $9 million.
MOG.A pays an annual dividend of $1.12, which translates to a yield of 0.73% at the current share price. Its four-year average dividend yield is 1.17%. Moreover, the company’s dividend payouts have increased at a CAGR of 13.3% over the past three years.
On August 24, 2023, MOG.A announced a deal with Bell Textron Inc., a Textron company, to work for the U.S. Army’s Future Long Range Assault Aircraft (FLRAA), the Bell V-280 Valor. Initially, the contract will fund core design and development activities through the Middle Tier Acquisition (MTA) phase of the program.
“We have a long history with Bell, and in 2013 made the strategic decision to align our interests and resources to secure this important win for our companies. We are proud to be part of this program which will provide warfighters with an unparalleled combination of range, speed, and combat capability,” said Mark Graczyk, President of Moog’s Military Aircraft business.
MOG.A’s revenue and EBITDA have grown at respective CAGRs of 6.7% and 13.8% over the past three years. The company’s EBIT has increased 18.2% over the same timeframe, while its normalized net income and tangible book value have improved at CAGRs of 17.1% and 35.9%, respectively.
During the fiscal 2024 first quarter that ended December 31, 2023, MOG.A’s net sales increased 12.7% year-over-year to $856.85 million. Its gross profit grew 14.5% from the year-ago value to $233.20 million. The company’s adjusted operating profit of $96.42 million indicates a growth of 22.4% year-over-year.
In addition, the company’s adjusted net earnings came in at $49.20 million, or $1.53 per share, up 23.7% and 22.4% from the prior year’s quarter, respectively. Its adjusted free cash flow was $22.97 million for the quarter.
As per the updated fiscal year 2024 financial guidance, MOG.A raised its net sales guidance to $3.50 billion, which was previously guided at $3.45 billion. The company’s adjusted net earnings per share is expected to be $6.90, raised from the prior guidance of $6.80.
Street expects MOG.A’s revenue and EPS for the second quarter (ending March 2024) to increase 4.4% and 18.8% year-over-year to $873.58 million and $1.69, respectively. Moreover, the company surpassed the consensus revenue estimate in each of the trailing four quarters.
Shares of MOG.A have gained 33.7% over the past six months and 50.7% over the past year to close the last trading session at $153.29.
MOG.A’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
The stock has a B grade for Growth, Momentum, Sentiment, and Stability. MOG.A is ranked #4 of 72 stocks within the Air/Defense Services industry.
Click here to access additional MOG.A ratings for Quality and Value.
Stock #1: Textron Inc. (TXT)
TXT operates internationally in aircraft, defense, industrial, and finance businesses. The company operates through six segments: Textron Aviation; Bell; Textron Systems; Industrial; Textron eAviation; and Finance. It manufactures, sells, and services business jets, turboprop and piston engine aircraft, and military trainer and defense aircraft.
On February 27, 2024, TRU Simulation, an affiliate of Textron Aviation, announced a new, cutting-edge Veris™ Virtual Reality (VR) flight simulator that offers helicopter and fixed-wing model customers a cost-effective and innovative solution to accomplish pilot training.
The Bell Training Academy (BTA) will be the official launch customer, the first one to use the Veris simulator for training on the Bell 505 and provide advanced training solutions to the aircraft’s rising customer base.
On February 18, Textron Aviation announced the delivery of a new Cessna Grand Caravan EX Amphibian turboprop to Malaysian property developer Ikhasas Sdn Bhd via its subsidiary company Oriental Sky Sdn Bhd. The aircraft is to be used for passenger transport between the capital city of Kuala Lumpur and a new waterfront resort on Perhentian islands.
TXT’s revenue and EBITDA have grown at respective CAGRs of 5.5% and 17.9% over the past three years. Over the same period, the company’s net income and EPS have improved at CAGRs of 43.9% and 50.1%, respectively.
For the fourth quarter that ended December 31, 2023, TXT’s total revenues grew 7.04% year-over-year to $3.89 billion. Its gross profit increased 25.5% year-over-year to $384 million. The company’s adjusted income from continuing operations rose 22.5% and 30.1% year-over-year to $316 million and $1.60 per share, respectively.
In addition, the company’s cash and cash equivalents were $2.12 billion as of December 31, 2023, compared to $1.96 billion as of December 31, 2022.
Analysts expect TXT’s revenue for the first quarter (ending March 2024) to increase 8.9% year-over-year to $3.29 billion. The company’s EPS for the ongoing quarter is expected to grow 23.1% year-over-year to $1.29. Moreover, the company has surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.
TXT’s shares have gained 21.9% over the past six months and 26.1% over the past year to close the last trading session at $92.13.
TXT’s POWR Ratings reflect its bright prospects. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
The stock has a B grade for Growth, Value, Quality, and Momentum. Within the Air/Defense Services industry, TXT is ranked #3 of 72 stocks.
In addition to the POWR Ratings we’ve stated above, we also have TXT ratings for Stability and Sentiment. Get all TXT ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
TXT shares rose $0.37 (+0.40%) in premarket trading Monday. Year-to-date, TXT has gained 14.56%, versus a 7.66% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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