The defense industry is witnessing substantial growth due to the rise in the demand for modern weaponry and aircraft owing to the escalating geopolitical challenges worldwide and increasing investments in disruptive technologies.
Amid this backdrop, investors could consider buying fundamentally strong defense stocks such as Embraer S.A. (ERJ), Allegion plc (ALLE), BWX Technologies, Inc. (BWXT), and TransDigm Group Incorporated (TDG). Before exploring the fundamentals of these stocks, let’s first understand what’s shaping the defense industry’s prospects.
A persistent rise in global military expenditure has been witnessed over the past few years due to heightened geopolitical tensions, including the Israel-Hamas conflict, Russia's attack on Ukraine, tensions in the South China Sea, and hostilities between Israel and Iran.
Nations are looking to bolster their national security by enhancing their defense capabilities through investments in modern aircraft, drones, missiles, etc. After several months of delay, the U.S. Congress passed an $825 billion defense budget bill for the fiscal year 2024 in March.
Moreover, the U.S. Department of Defense’s requested budget is approximately $850 billion for fiscal 2025, about 1% higher than this year’s budget request.
The deployment of several revolutionary technologies is driving the industry toward modernization. Advancements in radar and control systems, improved electronic warfare capabilities, superior aircraft weaponry, and the increasing integration of state-of-the-art technologies have bolstered the defense industry.
In addition, advancements in modern warfare and air defense systems have fueled the demand for aircraft, missiles, drones, unmanned aerial vehicles, and more. The global air defense system market is expected to reach over $71.73 billion by 2032, growing at a CAGR of 5.1%.
Considering these conducive trends, let’s examine the fundamentals of the four Air/Defense Services stock picks, beginning with the fourth choice.
Stock #4: Embraer S.A. (ERJ)
Headquartered in São Paulo, Brazil, ERJ designs, develops, manufactures, and sells aircraft and systems internationally. The company operates through Commercial Aviation, Defense & Security, Executive Aviation, Services & Support, and Other segments.
On May 21, 2024, ERJ, NIDC, and AHQ Group signed a Memorandum of Understanding to develop Saudi Arabia's aerospace ecosystem, focusing on Embraer aircraft adoption, technological cooperation, and supply chain development.
On May 17, 2024, ERJ and Eve signed an MoU with Groupe ADP to enhance low-carbon aviation at Paris-Le Bourget Airport, focusing on advanced air mobility and sustainable development. This includes new maintenance capabilities, eVTOL support, and hydrogen infrastructure preparation.
ERJ’s trailing-12-month CAPEX / Sales of 4.41% is 52% higher than the industry average of 2.90%.
ERJ’s revenue for the fiscal first quarter that ended March 31, 2024, increased 25.1% year-over-year to $896.60 million. Its gross profit rose 48.4% from the year-ago quarter to $168.70 million. Moreover, its adjusted EBITDA stood at $47.10 million, up 357.3% over the prior year quarter. Also, its cash and cash equivalents at the end of the period amounted to $912.70 million.
Analysts expect ERJ’s revenue for the quarter ending June 30, 2024, to increase 9.5% year-over-year to $1.41 billion. Its EPS for fiscal 2024 is expected to rise 63% year-over-year to $1.39. The company surpassed the Street revenue and EPS estimates in three of the trailing four quarters, which is impressive. Over the past year, the stock has gained 89.2% to close the last trading session at $28.10.
ERJ’s POWR Ratings reflect its positive prospects. It has an overall B rating, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
ERJ has an A grade for Growth and Value and a B for Momentum. Within the Air/Defense Services industry, it is ranked #25 out of 72 stocks. Click here for the additional POWR Ratings of ERJ (Stability, Sentiment, and Quality).
Stock #3: Allegion plc (ALLE)
Headquartered in Dublin, Ireland, ALLE manufactures and sells mechanical and electronic security products and solutions worldwide. It offers door controls and systems and exit devices, locks, locksets, portable locks, key systems and services, electronic security products, access control systems, and others.
On May 29, 2024, ALLE launched Schlage XE360 Series Wireless Locks, an electronic lock portfolio designed with multifamily market needs at an attractive price point, which allows multifamily operators to leverage a single access control and management solution without compromising security and design.
On May 15, 2024, ALLE announced the expansion of its indication trim portfolio with three new lines of Schlage Indication Solutions, a best-in-class lock portfolio designed specifically with K-12 and higher education security needs in mind while also serving the privacy application needs of healthcare, commercial and retail markets.
ALLE’s trailing-12-month net income margin of 14.93% is 146.2% higher than the industry average of 6.07%. Similarly, its trailing-12-month gross profit margin and EBITDA margin of 43.68% and 23.09% are 40.7% and 65.2% higher than the industry averages of 31.05% and 13.98%, respectively.
For the fiscal first quarter that ended March 31, 2024, ALLE’s net revenues stood at $893.90 million. Its gross profit increased marginally year-over-year to $391.40 million. Its adjusted EBITDA came in at $203.30 million.
For the same quarter, its adjusted net earnings attributable to ALLE and earnings per ordinary share attributable to ALLE shareholders amounted to $136.90 million and $1.55, respectively.
Street expects ALLE’s EPS and revenue for the quarter ending June 30, 2024, to increase 5.3% and 4% year-over-year to $1.85 and $948.83 million, respectively. The company surpassed consensus EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 13.5%, closing the last trading session at $120.45.
ALLE’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Stability and Quality. It is ranked #20 in the same industry. Get ALLE’s Growth, Value, and Sentiment ratings here.
Stock #2: BWX Technologies, Inc. (BWXT)
BWXT manufactures and sells nuclear components in the U.S., Canada, and internationally. It operates through two segments: Government Operations and Commercial Operations.
On April 19, 2024, BWXT announced an investment of C$80 million ($58.39 million) to expand its Cambridge manufacturing plant. The site’s increased footprint will enable greater capacity to support ongoing and anticipated customers’ investments in Small Modular Reactors, traditional large-scale nuclear, and advanced reactors in Canada and globally.
On April 8, 2024, BWXT and Rolls-Royce received $1.5 million from the UK Space Agency’s International Bilateral Fund for Phase 2 of a project to develop space nuclear power systems. This collaboration aims to enhance UK and U.S. space nuclear programs, supporting innovations for extended space missions.
BWXT’s trailing-12-month asset turnover ratio of 0.92x is 17% higher than the industry average of 0.79x. Its trailing-12-month Return on Common Equity and Return on Total Assets of 29.20% and 9.08% are 136.5% and 85.7% higher than the industry averages of 12.35% and 4.89%, respectively.
BWXT’s revenues for the first quarter that ended March 31, 2024, stood at $603.97 million, up 6.3% year-over-year. Its non-GAAP operating income grew 3.2% over the prior-year quarter to $94.60 million. In addition, its non-GAAP net income attributable to BWXT and earnings per common share increased 8.7% and 8.6% from the year-ago quarter to $69.70 million and $0.76, respectively.
For the quarter ending June 30, 2024, BWXT’s revenue and EPS are expected to increase 4.2% and 13.3% year-over-year to $638.14 million and $0.74, respectively. It surpassed consensus revenue and EPS estimates in each of the trailing four quarters. The stock has gained 46.2% over the past year to close the last trading session at $89.26.
BWXT’s POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to Buy in our proprietary rating system.
BWXT has a B grade for Momentum, Sentiment, and Quality. It is ranked #19 in the Air/Defense Services industry. Click here to see the additional POWR Ratings of BWXT for Growth, Value, and Stability.
Stock #1: TransDigm Group Incorporated (TDG)
TDG designs, produces, and supplies aircraft components in the U.S. and internationally. The company operates through Power & Control, Airframe, and Non-aviation segments.
On May 28, 2024, TDG announced that it entered into a definitive agreement to acquire Raptor Labs Holdco, LLC, a L Squared Capital Partners portfolio company. This acquisition is expected to create equity value that aligns with TDG’s long-term private equity-like return objectives.
On May 22, 2024, TDG announced that it had completed the acquisition of SEI Industries LTD. SEI's innovative products and excellent customer service at its global repair centers created a strong portfolio of established, long-term customers, and this acquisition is expected to create equity value in line with the company’s long-term private equity-like return objectives.
TDG’s trailing-12-month Return on Total Capital of 11.03% is 53% higher than the industry average of 7.21%. Likewise, its trailing-12-month EBIT margin and levered FCF margin of 45.37% and 25.06% are 342.3% and 281.3% higher than the industry averages of 10.26% and 6.57%, respectively.
For the fiscal second quarter that ended March 30, 2024, TDG’s net sales increased 20.5% year-over-year to $1.92 billion. The company’s gross profit stood at $1.15 billion, up 24% from the year-ago quarter. Furthermore, its adjusted net income rose 35.5% and 33.6% over the prior-year quarter to $462 million and $7.99 per share.
Analysts expect TDG’s EPS and revenue for the quarter ending June 30, 2024, to increase 16.7% and 14.5% year-over-year to $8.46 and $2 billion, respectively. The company surpassed the consensus EPS and revenue estimates in each of the trailing four quarters. TDG’s stock has gained 75.6% over the past year to close the last trading session at $1321.85.
TDG’s robust prospects are reflected in its POWR Ratings. It has an overall B rating, equating to Buy in our proprietary rating system.
TDG has a B grade for Momentum, Stability, Sentiment, and Quality. It is ranked #16 in the same industry. Beyond what we stated above, we have also rated TDG for Growth and Value. Get all the TDG ratings here.
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TDG shares were trading at $1,328.00 per share on Friday morning, up $6.15 (+0.47%). Year-to-date, TDG has gained 31.28%, versus a 10.38% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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