Growing concerns about geopolitical instability have brought defense stocks into the limelight. The militant organization Hamas’ attack on Israel has heightened the need for countries to shore up their military capabilities. In the wake of the geopolitical tensions, countries are highly likely to ramp up their defense spending. Therefore, defense companies will stand to gain.
Amid this backdrop, it could be prudent to buy fundamentally strong defense stocks Brady Corporation (BRC), Huntington Ingalls Industries, Inc. (HII), and Cadre Holdings, Inc. (CDRE). These stocks are rated A (Strong Buy) in our proprietary POWR Ratings system.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the defense industry is expected to perform well.
Wars have far-reaching impacts on the global economy. Countries worldwide spent a combined $2.24 trillion on their militaries in 2022, representing a rise of 3.7% year-over-year. The United States’ military spending stood at $877 billion. This year, the U.S. defense spending is projected to reach $886 billion.
Lockheed Martin Corporation’s Chairman, President and CEO Jim Taiclet said, “In the longer term, there are some things that are changing significantly. One is the global threat environment and the geopolitical situations getting more concerning and challenging. That’s refocusing the U.S. and certainly our allies around the world on national defense in an increasing manner.”
The continuing war in Ukraine, Israel and Gaza, and several geopolitical hotspots globally, has enhanced the focus on defense spending. These military flashpoints will likely be growth drivers for aerospace and defense companies. Investors’ interest in aerospace and defense stocks is evident from the iShares U.S. Aerospace & Defense ETF’s (ITA) 9.7% returns over the past year.
The global aerospace and defense market is projected to grow at a CAGR of 5.9% to reach $1.08 trillion.
Considering these conducive trends, let’s take a look at the fundamentals of the three Air/Defense Services stock picks, starting with number 3.
Stock #3: Brady Corporation (BRC)
BRC manufactures and supplies identification solutions (IDS) and workplace safety (WPS) products to identify and protect premises, products, and people. The company offers materials, printing systems, RFID, and bar code scanners for product identification, brand protection labeling, work-in-process labeling, finished product identification, industrial track and trace applications, safety signs, floor-marking tapes, pipe markets, etc.
HII’s revenue grew at a CAGR of 7.8% over the past three years. Its EBITDA grew at a CAGR of 14.5% over the past three years. In addition, its EPS grew at a CAGR of 21.8% in the same time frame.
BRC’s net sales for the fiscal first quarter ended October 31, 2023, increased 2.9% year-over-year to $331.98 million. Its operating income rose 16.2% over the prior-year quarter to $59.73 million. The company’s net cash provided by operating activities increased 122.4% year-over-year to $62.27 million.
Its non-GAAP net income rose 16.2% year-over-year to $49.05 million. Also, its non-GAAP EPS stood at $1, representing an increase of 19% year-over-year.
Analysts expect BRC’s EPS and revenue for the quarter ending January 31, 2024, to increase 16.1% and 4% year-over-year to $0.94 and $339.44 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. The stock has gained 21.5% year-to-date to close the last trading session at $57.21.
BRC’s POWR Ratings reflect this positive outlook. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #6 out of 71 stocks in the Air/Defense Services industry. It has an A grade for Quality. Click here to see additional ratings of BRC for Growth, Value, Momentum, Stability, and Sentiment.
Stock #2: Huntington Ingalls Industries, Inc. (HII)
HII engages in designing, building, overhauling, and repairing military ships. It operates through three segments: Ingalis, Newport News, and Mission Technologies. The company is involved in designing and constructing non-nuclear ships comprising amphibious assault ships and expeditionary warfare ships for the U.S. Navy and U.S. Coast Guard. It also offers nuclear-power ships, such as aircraft carriers and submarines.
On October 17, 2023, HII announced that its Mission Technologies division was a $244 million task order to integrate Minotaur software products into maritime platforms for the U.S. Navy, U.S. Marine Corps, and U.S. Coast Guard.
On October 11, 2023, HII announced that its Mission Technologies division was awarded a contract to build nine small unmanned undersea vehicles (SUUV) for the U.S. Navy’s Lionfish System program. The contract can grow to as many as 200 vehicles over the next five years with a total value of more than $347 million.
HII’s revenue grew at a CAGR of 7.1% over the past three years. Its Total Assets grew at a CAGR of 7.9% over the past three years. In addition, its levered FCF grew at a CAGR of 22.2% in the same time frame.
For the third quarter ended September 30, 2023, HII’s sales and service revenues increased 7.2% year-over-year to $2.82 billion. Its operating income rose 31.3% year-over-year to $172 million. The company’s net earnings increased 7.2% year-over-year to $148 million. Also, its EPS came in at $3.70, representing an increase of 7.6% year-over-year.
Street expects HII’s EPS for the quarter ending December 31, 2023, to increase 44% year-over-year to $4.42. Its revenue for the quarter ending March 31, 2024, is expected to increase 3.7% year-over-year to $2.77 billion. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past six months, the stock has gained 16.1% to close the last trading session at $243.59.
HII’s POWR Ratings reflect solid prospects. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
Within the same industry, HII is ranked #5. It has a B grade for Growth, Value, and Momentum. To see the other ratings of HII for Stability, Sentiment, and Quality, click here.
Stock #1: 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. It offers body armor products, survival suits, remotely operated vehicles, specialty tools, blast sensors, accessories, vehicle blast attenuation seats, bomb suits, duty gear, etc.
CDRE’s revenue grew at a CAGR of 2.9% over the past three years.
CDRE’s net sales for the third quarter, which ended September 30, 2023, increased 12.2% year-over-year to $125.11 million. Its adjusted EBITDA rose 14.4% over the prior-year quarter to $23.73 million. The company’s gross profit increased 22.5% year-over-year to $53.60 million. In addition, its net income rose 123.7% year-over-year to $11.05 million. Also, its EPS came in at $0.29, representing an increase of 123.1% year-over-year.
For the quarter ending December 31, 2023, CDRE’s EPS is expected to increase 11.8% year-over-year to $0.21. Its revenue for the quarter ending March 31, 2024, is expected to increase 5.1% year-over-year to $117.45 million. It surpassed the consensus EPS estimates in three of the trailing four quarters. The stock has gained 61.4% year-to-date to close the last trading session at $32.50.
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 is ranked #3 in the Air/Defense Services industry. It has an A grade for Quality and a B for Momentum and Stability. Click here to see the other ratings of CDRE for Growth, Value, and Sentiment.
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HII shares were trading at $244.03 per share on Thursday afternoon, up $0.44 (+0.18%). Year-to-date, HII has gained 8.24%, versus a 21.14% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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