Amid escalating geopolitical tensions, global economies are constantly prioritizing military and security concerns, leading to an increase in defense spending. Further, aerospace and defense companies are embracing new advanced technologies and innovation to capitalize on growth opportunities.
Against the backdrop, it could be suitable to invest in fundamentally sound defense stocks, L3Harris Technologies, Inc. (LHX), BWX Technologies, Inc. (BWXT), and Kaman Corporation (KAMN) for potential gains in 2024.
Global military spending has surged steadily in the past few years due to growing geopolitical tensions, including the recent Israel-Hamas war, Russia’s invasion of Ukraine, and tensions in the South China Sea. In 2023, defense expenditure in the U.S. stood at $746 billion. Further, U.S. defense spending may reach $1.10 trillion by 2033.
Major defense companies expect a solid demand in 2024 as the U.S. and its allies seek to load up on expensive weaponry and munitions amid perceived increased aggressive actions from Russia and China. Thus, ongoing wars have boosted the profit outlook for the aerospace and defense (A&D) industry this year.
US Congress has approved a whopping defense budget of $886 billion for 2024. It also has extended a controversial overseas electronic surveillance system widely used by U.S. intelligence services. This spending bill offers billions of dollars to “enhance US deterrence and defense posture in the Indo-Pacific region” and counter China's rising influence there.
Digital transformation in the A&D industry is further critical to optimizing production, enhancing maintenance, and driving innovation. Recent technological advancements include industrial sensors to track machine performance and potential quality issues, digital twin technology, advanced automation technology, inventory monitors, and AI/ ML technology.
In light of these favorable trends, let’s look at the fundamentals of the best three Air/Defence Services stocks, beginning with number 3.
Stock #3: L3Harris Technologies, Inc. (LHX)
LHX is an aerospace and defense technology company that offers mission-critical solutions for government and commercial customers internationally. The company operates in three segments: Integrated Mission Systems; Space and Airborne Systems; and Communication Systems.
On November 27, 2023, LHX announced the signing of a definitive agreement under which an affiliate of TJC L.P. will acquire L3Harris’ Commercial Aviation Solutions (CAS) business for $800 million. The transaction is expected to close in the first half of 2024.
“Today’s announcement is consistent with our multi-year strategy to optimize our national security, technology-focused portfolio,” said Christopher E. Kubasik, Chair and CEO at L3Harris. “Aligned with our capital allocation priorities, we plan to use the proceeds from this transaction to repay debt, which will accelerate our timeline to reach our debt leverage objective.”
On September 12, LHX and BAE Systems (BAESY), a part of a global defense, aerospace, and security company, delivered the first of 10 EC-37B Compass Call aircraft to the U.S. Air Force for formal combined developmental and operational testing.
The next-generation system will assist the Air Force’s 40-year mission of employing electromagnetic attack (EA) capabilities to support U.S. and coalition air, surface, and special operations forces.
During the third quarter that ended September 29, LHX reported revenue from product sales and services of $4.91 billion, representing growth of 15.7%year-over-year. Its income before income taxes came in at $400 million, against a loss before income taxes of $321 million in the prior year’s quarter.
In addition, net income and net income per share attributable to LHX amounted to $382 million and $2.02, compared to a net loss and net loss per share of 301 million and $1.56, respectively. The company’s total current assets as of September 29, 2023, were $7.50 billion, compared to $6.75 billion as of December 30, 2022.
Street expects LHX’s EPS and revenue for the fourth quarter (ended December 2023) to increase 1.2% and 15.5% year-over-year to $3.31 and $5.29 billion, respectively. Moreover, the company surpassed the consensus revenue estimate in all of the trailing four quarters.
Shares of LHX have gained 6.4% over the past month and 5.3% over the past six months to close the last trading session at $207.53.
LHX’s robust outlook is reflected in its POWR Ratings. 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, each weighted to an optimal degree.
The stock has a B grade for Growth and Momentum. LHX is ranked #25 out of 74 stocks in the Air/Defense Services industry.
Click here to access additional LHX ratings for Stability, Sentiment, Value, and Quality.
Stock #2: BWX Technologies, Inc. (BWXT)
BWXT engages in the manufacturing and selling of nuclear components worldwide. The company operates through two segments: Government Operations and Commercial Operations. It designs and manufactures naval nuclear components, reactors and nuclear fuel, commercial nuclear steam generators, heat exchangers, pressure vessels, and reactor components.
On November 16, BWXT’s subsidiary, BWXT Medical Ltd. and Fusion Pharmaceuticals Inc. (FUSN), announced that the companies had entered an agreement to supply generators to produce actinium-225, a medical isotope used to treat cancer in clinical trials.
This collaboration of the companies will be highly beneficial for their future operations and expansion.
On November 8, BWXT announced that it got selected as the nuclear fuel and components manufacturer for the Air Force Research Laboratory’s Joint Emergent Technology Supplying On-Orbit Nuclear (JETSON) high-power mission application program, which will mature high-power nuclear electric power and propulsion technologies and spacecraft design.
BWXT’s extensive nuclear fuel and component manufacturing experience on new and legacy programs, combined with its unique infrastructure, will position the company to deliver and fly a space nuclear system under the JETSON program.
For the third quarter that ended September 30, BWXT’s revenues grew 12.6% year-over-year to $589.99 million. Its non-GAAP operating income rose 6% from the year-ago value to $86.70 million. Its free cash flow of $43.40 million for the quarter indicates an increase of 70.9% from the prior year’s quarter.
Furthermore, the company’s adjusted EBITDA was $106.50 million, up 6% from the previous year’s quarter.
For the second quarter (ending June 2024), the company’s revenue and EPS are expected to grow 1.9% and 13.6% year-over-year to $624.06 million and $0.74, respectively. Also, the company has surpassed the consensus EPS estimates in each of the trailing four quarters.
BWXT’s shares have gained 7.1% over the past six months and 31.9% over the past year to close the last trading session at $75.90.
BWXT’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.
The stock has a B grade for Growth and Momentum. Within the Air/Defense Services industry, BWXT is ranked #23 of 74 stocks.
In addition to the POWR Ratings we’ve stated above, we also have BWXT ratings for Value, Quality, Stability, and Sentiment. Get all BWXT ratings here.
Stock #1: Kaman Corporation (KAMN)
KAMN engages in the aerospace, defense, medical, and industrial markets. It operates through three segments: Engineered Products; Precision Products; and Structures. The company produces and markets aircraft bearings and components, super precision, miniature ball bearings, and spring-energized seals.
On November 19, KAMN announced announced to pay a quarterly dividend of $0.20 per share on January 11, 2024, to shareholders of record on December 19, 2023. The company pays an annual dividend of $0.80, which translates to a yield of 3.48% at the current share price. Its four-year average dividend yield is 2.43%.
In the third quarter that ended September 29, 2023, KAMN’s net sales increased 6.4% year-over-year to $183.03 million. Its net earnings for the quarter were $1.47 million, against a net loss of $280 thousand in the prior year’s quarter. The company’s earnings per share was $0.05, compared to a loss per share of $0.01 in the same quarter of 2022.
Also, the company’s adjusted EBITDA rose 29.6% from the year-ago value to $25.23 million.
The company revised its full-year outlook for fiscal year 2023. KAMN now expects its net sales to range between $765 million and $775 million. It further expects its net earnings to be between $6.5 million and $12.2 million and adjusted EBITDA to reach $102.5 million and $110.0 million.
Analysts expect KAMN’s revenue and EPS for the fiscal year (ending December 2024) to increase 3.4% and 42% year-over-year to $794.74 million and $0.78. Also, the company topped the consensus EPS estimates in all four trailing quarters, which is impressive.
KAMN’s stock gained 10.5% over the past month and 6.5% over the past year to close the last trading session at $23.02.
KAMN’s POWR Ratings reflect its promising prospects. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
The stock has a B grade for Value, Growth, and Momentum. KAMN is ranked #20 of 74 stocks within the Air/Defense Services industry.
To see additional POWR Ratings of KAMN for Sentiment, Stability, and Quality, click here.
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LHX shares were trading at $206.00 per share on Friday morning, down $1.53 (-0.74%). Year-to-date, LHX has declined -2.19%, versus a -1.50% 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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