The defense industry is fuelled by technological advancement in the air defense systems and rising geopolitical instabilities. Given the industry’s steady growth prospects, investors could consider quality defense stocks CACI International Inc (CACI), OSI Systems, Inc. (OSIS), and Textron Inc. (TXT) for October.
The rising defense expenditure in various developed and emerging countries for developing various missile and air defense systems, rising geopolitical instabilities, and the changing nature of warfare are the prominent factors expected to boost the growth of the global air defense system market.
In addition, AI is revolutionizing the defense industry by enhancing decision-making and improving the efficiency of various defense systems. The missile defense system market is expected to reach $43.84 billion by 2027 at a CAGR of 11%.
Furthermore, technological breakthroughs are increasing the efficacy of missile and defence 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 favourable trends in mind, let’s delve into the fundamentals of the three best Air/Defense Services stocks, beginning with the third choice.
Stock #3: CACI International Inc (CACI)
CACI provides expertise and technology to enterprise and mission customers in support of national security missions and government modernization/transformation in the intelligence, defense, and federal civilian sectors. It operates through two segments, Domestic Operations; and International Operations.
On September 18, 2023, CACI announced that it had successfully completed the Optical Communication Terminal (OCT) Interoperability Testing (OIT) of its CrossBeam OCT for the Space Development Agency’s (SDA) Tranche 1 data relay and tracking network. As part of this testing, CACI was the first SDA-compliant terminal to successfully establish a consistent data communication link with the reference modem.
On August 22, 2023, CACI announced a new, multi-year Strategic Collaboration Agreement (SCA) with Amazon Web Services (AWS) to further advance the company’s application of AWS services as a trusted provider of secure, agile, innovative solutions that can be rapidly adopted by enterprise and mission customers in the U.S. government.
CACI’s trailing-12-month gross profit margin of 34.31% is 13.8% higher than the industry average of 34.31%. Its trailing-12-month asset turnover ratio of 1.01x is 24.8% higher than the industry average of 0.81x.
CACI’s revenues for the fiscal fourth quarter (ended June 30, 2023) increased 3.7% year-over-year to $1.70 billion, and its income from operations grew 24.2% from the year-ago quarter to $148.79 million. Furthermore, the company’s net income and EPS amounted to $107.77 million and $4.68, up 15.9% and 19.1% from the prior-year quarter, respectively.
Street expects CACI’s revenue for the fiscal first quarter ending September 2023 to grow 4.9% year-over-year to $1.68 billion. Its EPS is expected to increase 4% year-over-year to $4.53 for the same quarter. Also, it has surpassed its EPS and revenue estimates in three of the trailing four quarters, which is impressive.
CACI’s shares have gained 18.1% over the past month to close the last trading session at $315.93.
CACI’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 Stability and Sentiment. It is ranked #8 out of 71 stocks in the Air/Defense Services industry.
Beyond what is stated above, we’ve also rated CACI for Momentum, Growth, Value, and Quality. Get all CACI ratings here.
Stock #2: OSI Systems, Inc. (OSIS)
OSIS designs, manufactures, and sells electronics systems and components. It operates through three segments, Security; Healthcare; Optoelectronics; and Manufacturing.
On September 21, 2023, OSIS announced that its Security division was awarded a contract valued at approximately $10 million from an international customs agency to provide a dual-energy X-ray cargo and vehicle inspection solution, including multi-year follow on maintenance, service, and support.
On August 22, OSIS announced that its Rapiscan Itemiser 5X Explosive Trace Detection (ETD) device had met the qualification standards set by the TSA for inclusion on the Air Cargo Screening Technology List (ACSTL).
The ACSTL provides a list of approved technologies to be used by the air cargo industry, including carriers, freight forwarders, and shippers, for meeting the U.S. regulatory requirements and enhancing cargo security.
OSIS’s trailing-12-month EBIT margin of 10.24% is 126.9% higher than the industry average of 4.51%. Its trailing-12-month asset turnover ratio of 0.85x is 38.2% higher than the industry average of 0.62x.
OSIS’ total net revenues increased 22.3% year-over-year to $411.87 million in the fiscal fourth quarter that ended June 30, 2023. Its non-GAAP net income grew 34.8% year-over-year to $33.99 million and its non-GAAP EPS rose 35.7% from the year-ago quarter to $2.66.
Analysts expect OSIS’s revenue for the fiscal first quarter ending September 2023 to grow 4.8% year-over-year to $280.96 million. Its EPS is expected to be $0.86 for the same quarter. Also, it has surpassed its EPS estimates in each of the trailing four quarters.
Shares of OSIS have gained 64.1% over the past year to close the last trading session at $121.29.
It’s no surprise that OSIS has an overall rating of B, which equates to Buy in our proprietary rating system.
OSIS has a B grade for Value, Growth, and Sentiment. It is ranked #7 in the same industry.
In addition to the POWR Ratings highlighted above, one can access OSIS’s ratings for Momentum, Stability, and Quality here.
Stock #1: Textron Inc. (TXT)
TXT operates in the aircraft, defense, industrial, and finance businesses worldwide. It operates through six segments: Textron Aviation; Bell; Textron Systems; Industrial; Textron aviation; and Finance.
On September 15, 2023, TXT announced a quarterly dividend of $0.02 per share of common stock payable on October 1. TXT pays $0.08 annually in dividends, which translates to a yield of 0.10% at the current price. Its 4-year average dividend yield is 0.15%.
TXT’s trailing-12-month net income margin of 6.88% is 10.3% higher than the industry average of 6.23%, while its trailing-12-month ROTA of 5.49% is 8.7% higher than the industry average of 5.05%.
For the second quarter that ended July 1, 2023, TXT’s total revenues increased 8.6% year-over-year to $3.42 billion. Its adjusted income from continuing operations rose 23.3% over the prior-year quarter to $296 million. Its adjusted EPS from continuing operations came in at $1.46, representing an increase of 31.5% year-over-year.
Street expects TXT’s EPS and revenue for the third quarter ending September 30, 2023, to increase 22.6% and 12.7% year-over-year to $1.30 and $3.47 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters.
Over the past year, the stock has gained 30% to close the last trading session at $78.69.
TXT’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 Quality. It is ranked #3 in the same industry.
Click here to access the additional TXT ratings (Growth, Stability, and Sentiment).
What To Do Next?
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TXT shares were trading at $78.71 per share on Friday morning, up $0.02 (+0.03%). Year-to-date, TXT has gained 11.27%, versus a 13.47% 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.
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