Amidst the rise in global geopolitical conflicts, the defense industry is poised for long-term growth. Moreover, continuous innovation is paramount in response to the dynamic threat landscape. So, let us explore quality defense stocks Kaman Corporation (KAMN), CAE Inc. (CAE), and TAT Technologies Ltd. (TATT) as secure investments this year.
The air defense industry is gaining prominence amid rising geopolitical tensions, such as conflicts involving Israel-Hamas and Russia-Ukraine. With nations prioritizing military readiness, there's a potential increase in defense spending, offering opportunities for companies in this sector.
While the defense spending in the United States reached $746 billion last year, Projections indicate that defense spending will climb each year until 2033 to hit a whopping $1.10 trillion.
Moreover, the United States Congress recently authorized an enormous defense budget of $886 billion to “enhance US deterrence and defense posture in the Indo-Pacific region” and counter the growing influence of China in that area.
In addition, the evolving landscape of air-based warfare, marked by autonomous and sophisticated threats, has heightened the need for bolstering air defense capabilities. The air defense systems market is expected to expand due to the rising threats and increased defense expenditures supporting procurement and research in advanced technologies. As a result, the air defense systems market is expected to reach $21.41 billion in 2027, expanding at a CAGR of 7.4%.
Furthermore, the defense industry is experiencing enhanced prospects due to robust technology integration, with a notable focus on Artificial Intelligence (AI). Aerospace and defense companies are actively embracing AI across multiple areas, such as cockpit avionics, surveillance, decision-making, maintenance processes, and defect monitoring.
The AI and robotics in aerospace and defense market is expected to grow from $31.90 billion in 2024 to $45.80 billion in 2029, reflecting a 7.5% CAGR.
Considering these conducive trends, let’s now dive deeper into the fundamentals of these Air/Defense Services stocks, beginning with number three.
Stock #3: 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.
The stock’s EBITDA and levered free cash flow have grown at a CAGR of 4.1% and 13.9% over the past five years.
On January 11, 2024, KAMN paid a quarterly dividend of $0.20 per share. The company pays an annual dividend of $0.80, which translates to a yield of 1.78% at the current share price. Its four-year average dividend yield is 2.45%.
During 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 reported an EPS of $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 quarter to $25.23 million.
The company has updated its fiscal year 2023 projections. KAMN anticipates net sales to fall within the range of $765 million to $775 million. Additionally, the company projects net earnings to be in the range of $6.50 million to $12.20 million, and adjusted EBITDA is expected to reach $102.50 million to $110 million.
Street expects KAMN’s revenue and EPS for the fiscal first quarter (ending March 2024) to increase marginally and 150% year-over-year to $195.20 million and $0.12. Also, the company topped the consensus EPS estimates in all four trailing quarters, which is impressive.
KAMN’s stock gained 99.9% over the past year and 134.3% over the past three months to close the last trading session at $45.05.
KAMN’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted optimally.
The stock also has a B grade for Value, Growth, and Momentum. KAMN is ranked #16 within the 73-stock Air/Defense Services industry.
To see additional POWR Ratings of KAMN for Sentiment, Stability, and Quality, click here.
Stock #2: CAE Inc. (CAE)
Headquartered in Saint-Laurent, Canada, CAE provides simulation training and critical operations support solutions in Canada, the United States, the United Kingdom, Europe, Asia, Oceania, Africa, and the Rest of the Americas. It operates through three segments: Civil Aviation; Defense and Security; and Healthcare.
Over the past three years, CAE’s EPS and net income have risen at a CAGR of 63.9% and 70.8%.
In the fiscal 2024 second quarter, which ended on September 30, 2023, CAE’s revenue increased 9.6% year-over-year to CAD1.09 billion ($811.50 million), while its operating income amounted to CAD100.60 million ($74.90 million). The company’s attributable net income rose 31.2% from the year-ago quarter to CAD58.40 million ($43.48 million).
In addition, its EPS came in at CAD0.18, up 28.6% year-over-year.
Street expects CAE’s revenue for the third quarter (ended December 2023) to increase 4.9% year-over-year to $802.73 million, while its EPS for the same quarter is projected to come in at $0.19. Furthermore, its EPS is anticipated to improve by 12.4% per annum over the next five years.
The company surpassed its revenue estimates in three of the trailing four quarters and EPS estimates in each of the trailing four quarters, which is impressive.
CAE’s shares have surged 2.1% over the past month to close the last trading session at $20.79.
It’s no surprise that CAE has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Sentiment and a B for Momentum and Stability. Within the same industry, it is ranked #15.
In addition to the POWR Ratings we’ve stated above, we also have CAE’s ratings for Growth, Value, and Quality ratings here.
Stock #1: TAT Technologies Ltd. (TATT)
Headquartered in Israel, TATT and its subsidiaries offer solutions and services to the aerospace and defense industries globally. The company operates in four segments, including manufacturing heat transfer solutions and aviation accessories; providing maintenance, repair, and overhaul (MRO) services for heat transfer components; MRO services for aviation components; and overhauling and coating jet engine components.
The company’s revenue and EBITDA have grown at CAGRs of 5.5% and 43.7% over the past three years.
On January 16, TATT announced a new $10 million contract with an international air carrier for Maintenance, Repair, and Overhaul (MRO) services on GTCP331 model APUs. The contract strengthens TAT's leading position in APU 331-200 MRO, specifically for the widely used B757/767 fleet.
TATT's CEO, Igal Zamir, expressed satisfaction with the contract, highlighting the company's dominance in the commercial MRO segment for APU331-200.
On December 28, 2023, TATT reported the completion of its placement to Israeli institutional and accredited investors.
During the fiscal third quarter that ended September 2023, TATT’s total revenue rose 30.3% year-over-year to $29.93 million. Its gross profit increased 69.3% from the prior-year quarter to $5.81 million. The company reported an operating profit of 1.76 million, compared to a loss of $508 thousand in the prior-year quarter.
TATT generated a comprehensive income of $2.15 million, compared to a loss of $321 thousand in the year-ago quarter.
Shares of TATT have soared 105% over the past year and 52.3% over the past three months to close the last trading session at $12.
TATT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It has an A grade for Growth and a B for Value and Momentum. Within the same industry, it is ranked #14.
Click here to see TATT’s Stability, Sentiment, and Quality ratings.
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CAE shares were trading at $20.04 per share on Monday morning, down $0.75 (-3.61%). Year-to-date, CAE has declined -7.18%, versus a 1.83% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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