The Israel-Hamas war has led to a surge in global defense budgets amid geopolitical instabilities and warfare complexity. The US Congress approved a $886 billion defense budget for 2024, which signals significant opportunities for the US defense industry.
Given the industry’s steady growth prospects, investors could consider quality defense stocks OSI Systems, Inc. (OSIS), Brady Corporation (BRC), and Huntington Ingalls Industries, Inc. (HII) for profitable 2024.
The growing expenditure by governments and massive investments by nations toward strengthening their military presence is expected to drive the global missile defense system market. Additionally, the burgeoning procurements for missile defense systems and the constantly changing warfare with the rising geopolitical instabilities across the globe further augment the market growth.
The global missile defense system market is likely to grow at a CAGR of 11.5% until 2026.
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 reshaped modern warfare's landscape, and propelled 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.
With these favorable trends in mind, let's delve into the fundamentals of the three best Air/Defense Services stocks, beginning with the third choice.
Stock #3: OSI Systems, Inc. (OSIS)
OSIS designs and manufactures electronic systems and components. It operates in three segments: Security, Healthcare, and Optoelectronics and Manufacturing.
On December 6, 2023, OSIS announced that its Optoelectronics and Manufacturing division had received orders totalling approximately $5 million to provide electronic assemblies to a leading technology OEM. The Company plans to use its operations in the United Kingdom to fulfill these orders.
OSIS’s trailing-12-month EBIT margin of 10.36% is 110.4% higher than the industry average of 4.92%. Its trailing-12-month asset turnover ratio of 0.84x is 36.6% higher than the industry average of 0.62x.
OSIS’s total net revenues for the fiscal first quarter (ended September 30, 2023) increased 4.2% year-over-year to $279.21 million and its gross profit grew 12.9% from the year-ago quarter to $98.75 million. Furthermore, the company’s net income and EPS amounted to $12.88 million and $0.75, up 14.6% and 15.4% from the prior-year quarter, respectively.
Street expects OSIS’s revenue for the fiscal second quarter ended December 2023 to grow 23.2% year-over-year to $364.29 million. Its EPS is expected to increase 46.6% year-over-year to $1.75 for the same quarter. Also, it has surpassed its EPS estimates in each of the trailing four quarters, which is impressive.
OSIS’s shares have gained 588.5% over the past year to close the last trading session at $127.
OSIS’s POWR Ratings reflect its promising 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.
It has a B grade for Sentiment. It is ranked #17 out of 73 stocks in the Air/Defense Services industry.
Beyond what is stated above, we’ve also rated OSIS for Momentum, Growth, Value, Stability, and Quality. Get all OSIS ratings here.
Stock #2: 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.
BRC’s trailing-12-month EBIT margin of 17.41% is 77.5% higher than the industry average of 9.81%. Its trailing-12-month asset turnover ratio of 0.98x is 22.6% higher than the industry average of 0.80x.
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 15.2% and 4% year-over-year to $0.93 and $339.44 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past six months, the stock has gained 25.8% to close the last trading session at $60.58.
It’s no surprise that BRC has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
BRC has an A grade for Quality and a B for Sentiment and Stability. It is ranked #4 in the same industry.
In addition to the POWR Ratings highlighted above, one can access BRC’s ratings for Growth, Value, and Momentum here.
Stock #1: 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 trailing-12-month levered FCF margin of 7.35% is 22.8% higher than the industry average of 5.98%. Its trailing-12-month asset turnover ratio of 1.04x is 30.5% higher than the industry average of 0.80x.
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 ended December 31, 2023, to increase 44% year-over-year to $4.42. Its revenue for the quarter ending March 31, 2024, is expected to be $2.78 billion. It surpassed the Street revenue estimates in each of the trailing four quarters.
Over the past six months, the stock has gained 22.6% to close the last trading session at $256.30.
HII’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
The stock has a B grade for Momentum, Value, and Growth. It is ranked #2 in the same industry.
Click here to access the additional HII ratings (Quality, Stability, and Sentiment).
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
HII shares were trading at $258.71 per share on Thursday afternoon, up $2.41 (+0.94%). Year-to-date, HII has declined -0.36%, versus a -1.26% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
3 Defense Stocks Worth Considering for a Profitable 2024 StockNews.com
