In the current geopolitical climate, escalating military tensions are evident in conflicts across regions like Ukraine and Israel, alongside recent Houthi attacks on Red Sea cargo ships, prompting fears of wider distress in the Middle East. Consequently, nations globally are reevaluating their defense capabilities, fueling demand for aerospace and defense companies, particularly in the development of advanced air defense systems to mitigate aerial threats.
Hence, quality air defense stocks Elbit Systems Ltd. (ESLT), Cadre Holdings, Inc. (CDRE), and Willis Lease Finance Corporation (WLFC) could be solid buys for gains this month.
In December 2023, the US Congress passed a record defense budget of $886 billion for 2024, extending overseas electronic surveillance and allocating funds to enhance defense in the Indo-Pacific region. The bill also extends military aid to Ukraine and grants a significant pay raise for military personnel.
Moreover, considering the rising demand, the Department of the Air Force's FY 2024 budget request totals approximately $215.10 billion, reflecting a $9.30 billion or 4.5% increase from last year. Specifically, the Air Force's budget request is $185.10 billion, marking a $5.40 billion increase, while the Space Force's request is $30 billion, a $3.90 billion increase.
Additionally, the Department's Research, Development, Test, and Evaluation (RDT&E) request amounts to $55.40 billion, indicating a $4.90 billion increase from 2023. These budgetary boosts underscore the Department's dedication to aligning investments with the objectives outlined in the National Defense Strategy.
Further, aerospace and defense enterprises are harnessing technologies such as artificial intelligence and machine learning to enhance efficiency and deliver precise predictive maintenance for defense systems, thereby minimizing downtimes. Additionally, the integration of 3D printing facilitates the development of novel products, fortifies supply chains, and tackles logistical challenges.
The global air defense systems market is estimated to grow at a CAGR of 6.8% between 2024 and 2032.
Considering these conducive trends, let's take a look at the fundamentals of the three best Air/Defense Services stocks, starting with number 3.
Stock #3: Elbit Systems Ltd. (ESLT)
Headquartered in Haifa, Israel, ESLT develops and supplies a range of airborne, land, and naval systems and products for defense, homeland security, and commercial aviation. The company’s operations span Aerospace; C4I and Cyber; ISTAR and EW; Land; and Elbit Systems of America segments.
ESLT’s trailing-12-month cash per share of $2.71 is 13.9% higher than the industry average of $2.38 industry average.
On February 26, 2024, ESLT announced the awarding of a contract valued at approximately $600 million to supply systems to Hanwha Defense Australia for the Australian Land 400 Phase 3 Project. The project aims to enhance the Australian Army's Redback Infantry Fighting Vehicles (IFV) with advanced protection, fighting capabilities, and sensor suites.
The five-year contract reaffirms ESLT's commitment to delivering cutting-edge defense technologies to safeguard troops on the modern battlefield.
On February 12, ESLT unveiled its latest Unmanned Aerial System (UAS), designed to tackle the evolving challenges in aerospace and defense. The advanced UAS, with its next-generation digital architecture and multi-mission capability, enhances operational efficiency, potentially boosting ESLT’s revenue by catering to diverse mission requirements.
Moreover, with its multi-role platform accommodating flexible payload configurations, ESLT stands to attract lucrative contracts from defense agencies and private entities seeking state-of-the-art solutions, solidifying its financial growth and competitive edge.
The company pays an annual dividend of $2, which yields 0.93% on the prevailing price level. The company has raised its dividend payout at a CAGR of 6.2% over the past three years.
During the fiscal 2023 third quarter that ended September 30, 2023, ESLT’s non-GAAP gross profit increased 10.6% year-over-year to $373.80 million. Its non-GAAP operating income grew 38.8% from the year-ago value to $117 million. Additionally, non-GAAP net income attributable to ESLT shareholders rose 17.4% from the prior year’s period to $73.50 million, and non-GAAP net EPS increased 17.9% year-over-year to $1.65.
Street expects ESLT’s revenue and EPS to rise 8.1% and 5.8% year-over-year to $6.46 billion and $5.67 in the fiscal year ending December 2024.
Over the past year, the stock has gained 16.7%, closing the last trading session at $206.38.
ESLT’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.
ESLT has a B grade for Stability, Momentum, and Sentiment. It is ranked #9 within the Air/Defense Services industry.
In addition to the POWR Ratings stated above, one can access ESLT’s additional Growth, Value, and Quality ratings 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.
CDRE’s trailing-12-month levered FCF margin of 12.98% is 97.9% higher than the industry average of 6.56%. Its trailing-12-month asset turnover ratio of 1.17x is 47.4% higher than the industry average of 0.80x.
On March 4, CDRE finalized its acquisition of Alpha Safety Intermediate, LLC, the parent company of Alpha Safety, a prominent provider of nuclear safety solutions. The acquisition cost $106.50 million, excluding adjustments for working capital, and was financed using cash reserves and an expansion of term debt under
On February 16, CDRE paid a quarterly cash dividend of $0.0875 per share, or $0.35 per share on an annualized basis, which represents an increase of $0.03 per share, or 9.4% per share, over the previous annualized dividend of $0.32 per share. The company’s annual dividend yields 0.91% on the current market price, compared to a four-year average of 1.10%.
During the fiscal fourth quarter that ended December 31, 2023, CDRE’s net sales increased marginally year-over-year to $124.58 million. The company’s gross profit increased 2.5% year-over-year to $49.76 million. Additionally, its net income rose 45.4% year-over-year to $9.59 million. Its adjusted EBITDA amounted to $20.69 million.
Also, its EPS came in at $0.25, representing an increase of 47.1% over the prior-year quarter.
For the fiscal year 2024, CDRE anticipates net sales between $553 million to $572 million and adjusted EBITDA ranging from $104 million to $108 million. Capital expenditures are projected to fall within $8 million to $10 million.
For the quarter ending March 31, 2024, CDRE’s revenue is expected to increase 14.5% year-over-year to $127.98 million. Its EPS for the same quarter is expected to increase 59.3% year-over-year to $0.29. It surpassed the Street EPS estimates in three of the trailing four quarters, which is impressive.
Over the past nine months, the stock has gained 90.2% to close the last trading session at $38.03.
CDRE’s sound prospects are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Quality and a B for Momentum, Stability, and Sentiment. Within the same industry, it is ranked #5.
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.
WLFC’s trailing-12-month EBIT and EBITDA margins of 33.80% and 57.46% are 239.8% and 317.6% higher than the industry averages of 9.95% and 13.76%.
In October, WLFC’s subsidiary, Willis Engine Structured Trust VII, had priced $410 million in fixed-rate notes secured by a portfolio of 51 aircraft engines and four airframes. The Notes have a fixed coupon of 8%, an expected maturity of approximately six years, and will be issued at 98.84814% of par.
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.
Over the past six months, the stock has gained 14.5% to close the last trading session at $47.62.
It’s no surprise that WLFC has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system.
It has a B grade for Growth, Value, Momentum, Sentiment, and Quality. It is ranked first in the same industry.
Click here to see WLFC’s Stability rating.
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ESLT shares were trading at $201.25 per share on Tuesday afternoon, down $5.13 (-2.49%). Year-to-date, ESLT has declined -5.63%, versus a 8.63% 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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