After a successful year, the demand for A&D products and services will continue to remain strong in 2024, driven by an expected upward trajectory of air travel and growing geopolitical instability amid ongoing Israel-Hamas and Russia-Ukraine conflicts. Also, A&D companies will embrace digitalization and adopt emerging technologies, boosting the industry’s prospects.
Given the industry’s tailwinds, it could be wise to invest in fundamentally sound air defense stock CAE Inc. (CAE). However, investors could wait for a better entry point in Air Lease Corporation (AL) and MSA Safety Incorporated (MSA).
Last year, the aerospace and defense (A&D) industry witnessed a resurgence in demand for products and services. Across the aerospace sector, domestic commercial aviation revenue passenger kilometers topped pre-pandemic levels in most nations.
According to the International Air Transport Association (IATA), overall traffic measured in revenue passenger kilometers (RPKs) in 2023 grew by 36.9% compared to 2022. The significant growth in air travel led to a high demand for new aircraft and aftermarket products and services.
Talking about the U.S. defense sector, new geopolitical risks and the prioritization of modernizing the military drove strong demand last year, particularly for weapons and next-generation capabilities. Further, the demand for A&D products and services is expected to remain robust in 2024, as air travel will likely continue its upward trajectory and geopolitical instability grows.
For 2024, the U.S. Congress approved a whooping defense budget of about $886 billion while extending a controversial overseas electronic surveillance system widely used by U.S. intelligence services. The vast spending bill will provide funding to “enhance US deterrence and defense posture in the Indo-Pacific region” and counter China’s growing influence there.
Digital transformation in the A&D industry is further critical to optimize production and operations, enhance maintenance, drive innovation, and improve decision-making. Aerospace and defense companies are increasingly adopting advanced technologies, including artificial intelligence (AI), big data analytics, the Internet of Things (IoT), and cloud computing.
The AI and robotics in the aerospace and defense market is expected to total $45.80 billion by 2029, expanding at a CAGR of 7.5% during the forecast period (2024-2029).
Given the industry’s favorable trends, let’s look at the fundamentals of the three Air/Defence Services stocks, starting with the third choice.
Stocks to Hold:
Stock #3: Air Lease Corporation (AL)
AL is an aircraft leasing company that engages in the purchase and leasing of commercial jet aircraft to airlines worldwide. The company also sells aircraft from its fleet to third parties, including other leasing companies, financial services companies, airlines, and other investors.
On December 15, 2023, AL announced the delivery of one new Airbus A321-200neo aircraft to Transavia. The aircraft is the first of seven new Airbus A321s confirmed to deliver to Transavia on long-term lease from AL’s order book with Airbus and the first A321-200neo to join the Dutch carrier’s fleet.
AL’s trailing-12-month EBIT margin and net income margin of 50.98% and 20.97% are significantly higher than the industry averages of 9.76% and 6.02%, respectively. But the stock’s trailing-12-month ROCE of 7.37% is 39.8% higher than the industry average of 12.25%.
In terms of forward non-GAAP P/E, AL is trading at 6.35x, 67.3% lower than the industry average of 19.44x. Further, the stock’s forward EV/EBITDA multiple of 8.79 is 27.1% lower than the industry average of 12.06. However, its forward Price/Sales of 1.66x is 12.3% higher than the industry average of 1.48x.
During the fourth quarter that ended December 31, 2023, AL’s revenue increased 19.1% year-over-year to $716.60 million. Its adjusted net income before income taxes came in at $213.90 million, up 35.2% from the prior year’s quarter. Also, its adjusted EPS before income taxes rose 35.2% year-over-year to $1.92.
However, the company’s cash and cash equivalents came in at $460.87 million as of December 31, 2023, compared to $766.42 million as of December 31, 2022.
Street expects AL’s revenue for the first quarter (ending March 2024) to grow 5.7% year-over-year to $672.22 million. But its EPS for the ongoing quarter is expected to decrease 13% year-over-year to $0.92. Moreover, the company failed to surpass consensus EPS estimates in each of the trailing four quarters.
Shares of AL have gained 9.9% over the past month to close the last trading session at $43.13. But the stock has declined 3.7% over the past year.
AL’s mixed outlook is reflected in its POWR Ratings. The stock has an overall rating of C, which translates to a Neutral 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 C grade for Growth, Stability, Sentiment, Value, and Quality. AL is ranked #24 out of 72 stocks in the Air/Defense Services industry.
Click here to access additional AL ratings.
Stock #2: MSA Safety Incorporated (MSA)
MSA develops, manufactures, and supplies safety products and software that protect people and facility infrastructures in the oil, gas, petrochemical, fire service, construction, industrial manufacturing applications, heating, ventilation, air conditioning and refrigeration, utilities, military, and mining industries.
MSA’s trailing-12-month gross profit margin and EBIT margin of 47.67% and 21.73% are 56% and 122.7% higher than the respective industry averages of 30.35% and 9.76%. Likewise, the stock’s trailing-12-month levered FCF margin of 15.43% is 138.6% higher than the industry average of 6.47%.
In terms of forward EV/Sales, MSA is trading at 3.97x, 114.8% higher than the industry average of 1.85x. Also, the stock’s forward EV/EBITDA multiple of 15.34 is 27.2% higher than the industry average of 12.06. And its forward Price/Sales of 3.72x is considerably higher than the industry average of 1.48x.
For the fourth quarter that ended December 31, 2023, MSA’s net sales grew 11.7% year-over-year to $495 million. Its adjusted operating income increased 19.8% from the year-ago value to $115 million. Further, the company’s adjusted earnings and adjusted EPS were $82 million and $2.06, up 15.5% and 14.4% from the previous year’s quarter, respectively.
Analysts expect MSA’s revenue for the first quarter (ending March 2024) to increase 7% year-over-year to $426.10 million. The consensus EPS estimate for the current quarter indicates an improvement of 12.7% year-over-year. Additionally, the company’s consensus revenue and EPS estimates topped in all four trailing quarters.
MSA’s shares have gained 9% over the past month to close the last trading session at $177.94. However, the stock growth over the past six months was marginal only.
MSA’s POWR Ratings reflect its mixed prospects. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system.
The stock has a C for Growth, Stability, and Momentum. Within the Air/Defense Services industry, MSA is ranked #22 of 72 stocks.
In addition to the POWR Ratings we’ve stated above, we also have other ratings for MSA (Sentiment, Quality, and Value). Get all MSA ratings here.
Stock to Buy:
Stock #1: CAE Inc. (CAE)
Headquartered in Saint-Laurent, Canada, CAE provides simulation training and critical operations support solutions internationally. The company operates through three segments: Civil Aviation; Defense and Security; and Healthcare. It offers training solutions for flight, cabin, maintenance, and ground personnel in commercial, business, and helicopter aviation.
On January 30, CAE and Global Crossing Airlines (GlobalX) signed a long-term exclusive pilot training agreement to deploy and operate an Airbus A320 family full-flight simulator (FFS) in Miami, Florida. The FFS is expected to be ready for training in the first quarter of 2024 to support GlobalX’s growth and the expansion of its Airbus A320 freighter fleet.
“We are happy to welcome GlobalX as a new CAE customer, and with this long-term agreement, we look forward to supporting the airline’s growth with this A320 FFS,” said Michel Azar-Hmouda, CAE’s Division President, Commercial Aviation Training. “CAE’s objective is to be close to its customers and provide an immersive training experience that gives pilots the knowledge and confidence to be at their best every time they fly.”
On January 9, CAE was awarded a contract for the U.S. Army Future Long Range Assault Aircraft (FLRAA) program by Bell Textron Inc. As an FLRAA team member, CAE will give operator and maintenance training aids, devices, simulators, and simulations (TADSS), which include advanced maintenance training systems and display and simulation effects for operator training.
The initial contract award includes virtual prototyping and developing visual display systems and radio simulations for portable flight trainers. This deal should bode well for both the companies.
CAE’s trailing-12-month EBIT margin of 11.86% is 21.5% higher than the industry average of 9.76%. Similarly, the stock’s trailing-12-month CAPEX/Sales of 6.62% is 123.9% higher than the industry average of 2.96%.
In terms of forward non-GAAP PEG, CAE is trading at 1.07x, 40.7% lower than the industry average of 1.81x. Further, the stock’s forward EV/EBITDA multiple of 11.18 is 7.3% lower than the industry average of 12.06. Likewise, its forward Price/Book of 1.70x is 39.6% lower than the industry average of 2.82x.
In the fiscal 2024 third quarter that ended December 31, 2023, CAE’s revenue increased 12.8% year-over-year to C$1.09 billion ($806.40 million). Its adjusted segment operating income for the quarter was C$145.10 million ($107.35 million). The company’s adjusted order intake came in at C$1.27 billion ($930.57 million), up 7.1% from the prior year’s quarter.
In addition, the company’s total current assets as of December 31, 2023, were C$2.41 billion ($1.78 billion), compared to total current assets of C$2.23 billion ($1.65 billion) as of March 31, 2023.
Street expects CAE’s revenue and EPS for the fourth quarter (ending March 2024) to increase 3.5% and 21.4% year-over-year to $957.66 million and $0.31, respectively. Also, the company surpassed consensus revenue and EPS estimates in three of the four trailing quarters, which is impressive.
CAE’s stock has plunged 5.9% over the past month to close the last trading session at $19.36.
CAE’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 Stability and Momentum. CAE is ranked #15 of 72 stocks within the Air/Defense Services industry.
To see additional POWR Ratings of CAE for Value, Growth, Sentiment, and Quality, click here.
What To Do Next?
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MSA shares were unchanged in premarket trading Friday. Year-to-date, MSA has gained 5.68%, versus a 5.43% 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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