The military flashpoints that have taken place over the past few years have put nations on red alert. Countries are now focusing on enhancing their military capabilities for protection against potential threats and maintaining national security. This has led to a rise in defense spending.
Additionally, advancements in technology are also aiding the growth of companies in the defense sector as countries look for more effective defense solutions.
Therefore, it could be wise to add fundamentally strong defense stocks Huntington Ingalls Industries, Inc. (HII), Brady Corporation (BRC), Cadre Holdings, Inc. (CDRE) and Willis Lease Finance Corporation (WLFC) to one’s watchlist. These stocks are A-rated (Strong Buy) in our proprietary rating system, POWR Ratings.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the defense sector’s prospects.
In today’s era of complex geopolitical relations, military flashpoints are becoming increasingly common. Conflicts persist in Ukraine, Israel, and several other parts of the globe. Recently, Houthi attacks on cargo ships in the Red Sea have stoked fears of a broader Middle Eastern conflict.
These factors are leading other countries to focus on enhancing their military capabilities by purchasing advanced warships, submarines, cutting-edge equipment, unmanned aerial vehicles (UAVs), missile defense systems, etc.
The increasing adoption of advanced air defense systems for battle to tackle the emerging spectrum of threats posed by aerial attacks is boosting the demand for aerospace and defense companies.
The aerospace and defense market is expected to grow at a CAGR of 5.9% to reach $1.08 trillion by 2027. Moreover, the global air defense systems market is estimated to grow at a CAGR of 6.8% between 2024 and 2032.
Furthermore, aerospace and defense companies are utilizing technologies like artificial intelligence and machine learning to improve efficiency and provide precise predictive maintenance in defense systems, reducing downtimes. Also, the adoption of 3D printing is helping create new products, create resilient supply chains, and address logistical issues.
With these favorable trends in mind, let’s delve into the fundamentals of the four best Air/Defense Services stock picks, beginning with the fourth choice.
Stock #4: Huntington Ingalls Industries, Inc. (HII)
HII engages in designing, building, overhauling, and repairing military ships. It operates through three segments: Ingalls, Newport News, and Mission Technologies. The company is involved in designing and constructing non-nuclear ships, expeditionary warfare ships, surface combatants, and national security cutters. It also provides nuclear-powered ships, naval nuclear support services, etc.
On January 19, 2024, HII announced that its Mission Technologies division secured a $197 million recompete task order contract to conduct R&D for the Joint Training Synthetic Environment (JTSE), blending live and virtual training into a single synthetic environment that enables joint force readiness. The task order has a five-year term.
In terms of the trailing-12-month levered FCF margin, HII’s 7.35% is 22.3% higher than the 6.01% industry average. Likewise, its 15.63% trailing-12-month Return on Common Equity is 27.1% higher than the industry average of 12.30%. Furthermore, the stock’s 1.04x trailing-12-month asset turnover ratio is 28.9% higher than the industry average of 0.81x.
For the fiscal third quarter, which ended September 30, 2023, HII’s sales and service revenues increased 7.2% year-over-year to $2.82 billion. Its operating income increased 31.3% year-over-year to $172 million. The company’s net earnings rose 7.2% over the prior year quarter 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 40.4% year-over-year to $4.31. Its revenue for the quarter ending March 31, 2024, is expected to increase 3.5% year-over-year to $2.77 billion. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has gained 21.4% to close the last trading session at $256.23.
HII’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. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Growth, Value, and Momentum. It is ranked #4 out of 73 stocks in the Air/Defense Services industry. Click here to access the additional HII ratings (Stability, Sentiment, and Quality).
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, bar code scanners, brand protection labeling, work-in-process labeling, finished product identification, industrial track and trace applications, safety signs, floor-marking tapes, pipe markers, etc.
In terms of the trailing-12-month gross profit margin, BRC’s 50.23% is 65% higher than the 30.44% industry average. Likewise, its 17.41% trailing-12-month EBIT margin is 76.8% higher than the industry average of 9.85%. Furthermore, the stock’s 19.74% trailing-12-month EBITDA margin is 44.8% higher than the industry average of 13.64%.
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 non-GAAP net income rose 16.2% year-over-year to $49.05 million. Also, its non-GAAP EPS stood at $1, registering 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 has topped the Street EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 20.3% to close the last trading session at $59.89.
BRC’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Quality and a B for Stability and Sentiment. It is ranked #3 in the same industry. In addition to the ratings highlighted above, one can access BRC’s ratings for Growth, Value, and Momentum here.
Stock #2: 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.
On December 22, 2023, CDRE announced that it entered into a definitive agreement to acquire ICOR Technology Inc.
CDRE’s Chairman and CEO Warren B. Kanders said, “We are pleased to enter into the agreement to acquire ICOR, meeting our established M&A criteria. With a leading market position, high margins, compelling macroeconomic trends, and resiliency through cycles, ICOR is an ideal add-on to Cadre’s EOD business.”
“Importantly, the addition of ICOR will meaningfully expand our ability to provide mission-critical EOD robots to law enforcement agencies and military organizations, which is an area that we are intimately familiar and support by anticipated strengthening tailwinds,” he added.
In terms of the trailing-12-month net income margin, CDRE’s 7.40% is 20.6% higher than the 6.14% industry average. Likewise, its 11.01% trailing-12-month levered FCF margin is 83.2% higher than the industry average of 6.01%. Furthermore, the stock’s 8.48% trailing-12-month Return on Total Assets is 71.9% higher than the industry average of 4.93%.
For the fiscal third quarter that ended September 30, 2023, CDRE’s net sales 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. Additionally, 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% over the prior year quarter.
For the quarter ending March 31, 2024, CDRE’s revenue is expected to increase 6.7% year-over-year to $119.19 million. Its EPS for the quarter ended December 31, 2023, is expected to increase 10.9% year-over-year to $0.21. It surpassed the Street EPS estimates in three of the trailing four quarters, which is impressive. Over the past year, the stock has gained 55.1% to close the last trading session at $33.67.
CDRE’s solid prospects are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
Within the Air/Defense Services industry, it is ranked #2. It has an A grade for Quality and a B for Momentum, Stability, and Sentiment. To see the other ratings of CDRE for Growth and Value, click here.
Stock #1: Willis Lease Finance Corporation (WLFC)
WLFC operates as a lessor and servicer of commercial aircraft and aircraft engines worldwide. The company operates through two segments: Leasing and Related Operations and Spare Parts Sales. It also focuses on engine management and consulting business. It serves commercial aircraft operators, as well as maintenance, repair, and overhaul organizations.
In terms of the trailing-12-month EBIT margin, WLFC’s 33.80% is 243.2% higher than the 9.85% industry average. Likewise, its 57.46% trailing-12-month EBITDA margin is 321.4% higher than the industry average of 13.64%. Furthermore, the stock’s 45.04% trailing-12-month Capex/Sales is significantly higher than the industry average of 2.95%.
WLFC’s total revenue for the fiscal third quarter ended September 30, 2023, increased 37.5% year-over-year to $105.75 billion. Its net income attributable to common shareholders rose 148.3% over the prior-year quarter to $13.78 million. The company’s income from operations increased 128.7% year-over-year to $20 million. Also, its income per common share came in at $2.13, representing an increase of 139.3% year-over-year.
Street expects WLFC’s EPS to increase 15% per annum over the next five years. Over the past six months, the stock has gained 17.8% to close the last trading session at $46.80.
It’s no surprise that WLFC has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system.
It is ranked first in the same industry. It has a B grade for Growth, Value, Momentum, Sentiment, and Quality. Click here to see WLFC’s rating for Stability.
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HII shares were trading at $258.37 per share on Monday afternoon, up $2.14 (+0.84%). Year-to-date, HII has declined -0.49%, versus a 1.79% 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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