Top 3 Defense Stocks to Buy in October

Recent tensions in the geopolitical landscape, particularly the Israel-Hamas confrontations, have shifted investors' attention to the defense sector. Factors like global increases in defense budgets and steady technological advancements position the industry for sustained growth.

Therefore, fundamentally strong defense stocks Ruger & Company, Inc. (RGR), BAE Systems plc (BAESY), and CPI Aerostructures, Inc. (CVU) could be ideal portfolio additions.

Driven by the Ukraine-Russia conflict, nations globally face a newfound emphasis on strengthening their military and air defense capabilities. According to the Stockholm International Peace Research Institute, global military expenditure reached an unprecedented high, attaining $2.24 trillion in 2022.

Moreover, the situation escalated with Hamas’ sudden attack on Israeli communities on October 7, prompting a retaliatory response from Israel. This incendiary scenario has spurred investor interest in aerospace and defense stocks. This Israel-Hamas clash adds to the burgeoning international arms sales trend that is elevating profits and the weapons production capacities of American suppliers.

According to BofA Securities, a potential investment surge in the Department of Defense might arise from this conflict. The bank's analysts predict that the U.S. will supply multiple defense utilities like missiles, munitions, and anti-missile systems to assist Ukraine and Israel. This could potentially enhance the performance of major U.S.-based defense contractors.

Amid prevailing geopolitical unrest, nations globally have prioritized territorial defense against possible threats, intensifying the focus on bolstered air defense capabilities. Numerous countries significantly invest in their military capabilities, triggering a demand surge in military aircraft and ammunition to strengthen defense systems.

Fueled by technologically advanced weaponry and aircraft, coupled with the rising incorporation of innovative technologies into defense systems, the global aerospace and defense market is anticipated to reach $1.08 trillion by 2027, growing at a CAGR of 5.9%. Investors’ interest in defense stocks is evident from the SPDR S&P Aerospace & Defense ETF’s (XAR) 17.9% returns over the past year.

Given the industry tailwinds, it's time to examine the three stocks to buy in the Air/Defense Services industry, starting with the third in line.

Stock #3: Sturm, Ruger & Company, Inc. (RGR)

RGR is a firearms manufacturer that designs, produces, and sells rifles, pistols, and revolvers and operates through two segments: Firearms and Castings. Its products are distributed to licensed wholesale distributors primarily in the United States for commercial sporting use. It also offers firearm accessories and replacement parts.

RGR pays a $1.51 per share dividend annually, translating to a 2.77% yield on the current share price.

Its four-year average dividend yield is 7.47%. The company’s dividend payouts have grown at a CAGR of 12.5% over the past three years and 6.5% over the past five years.

RGR’s trailing-12-month ROTA of 17.10% is 339.1% higher than the 3.89% industry average. Its trailing-12-month levered FCF margin of 9.30% is 82.5% higher than the industry average of 5.10%.

Over the past three and five years, its revenue grew at CAGRs of 8.6% and 3.8%, respectively. Its net income grew at a 6.7% CAGR over the past five years.

For the second quarter that ended July 1, 2023, RGR’s total net sales increased 1.5% year-over-year to $142.80 million. The company’s net firearms and castings sales rose 1.4% and 28.2% year-over-year, respectively. Its net income and earnings per share stood at $16.19 million and $0.91, respectively.

In addition, the company’s current liabilities were reduced to $59.89 million as of July 1, 2023, compared to $163.07 million as of December 31, 2022.

RGR’s revenue and EPS are expected to come at $567.67 million and $3.53, respectively, for the fiscal year ending December 2023. For the fiscal year ending December 2024, its revenue and EPS are expected to increase 3.7% and 10.2% year-over-year to $588.80 million and $3.89, respectively.

RGR’s shares have gained 2.8% over the past year to close the last trading session at $55.09. The stock gained 8.8% year-to-date.

RGR’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

RGR also has an A grade for Quality and a B for Value, Momentum, and Stability. It is ranked #5 out of 71 stocks in the Air/Defense Services industry.

Beyond what we have highlighted above, to see RGR’s additional POWR Ratings for Value, Sentiment, and Growth, click here.

Stock #2: BAE Systems plc (BAESY)

Based in Farnborough, the United Kingdom, BAESY provides defense, aerospace, and security solutions worldwide. The company operates through five segments: Electronic Systems, Cyber & Intelligence, Platforms & Services (US), Air, and Maritime.

On October 9, BAESY featured a prototype variation of the Armored Multi-Purpose Vehicle (AMPV) at AUSA 2023, clearing the way for future variants. The AMPV program was awarded a full-rate production contract in August 2023.

As the underpinning of the future for the army and its allies, the AMPV significantly improves power, mobility, interoperability, and survivability for soldiers.

On September 13, BAESY signed a contract with the Swedish Defence Materiel Administration (FMV) worth approximately $500 million for 48 new ARCHER artillery systems for the Swedish Army. This should bode well for BAESY.

BAESY pays a $1.41 per share dividend annually, translating to a 2.66% yield on the current share price. Its four-year average dividend yield is 4.08%. The company’s dividend payouts have grown at a CAGR of 5.2% over the past three years and 4.2% over the past five years.

BAESY’s trailing-12-month gross profit and net income margins of 63.12% and 8.62% are 108% and 39.2% higher than the industry averages of 30.35% and 6.19%, respectively. Furthermore, its 11.17% trailing-12-month cash from operations of $4.86 billion is significantly higher than the industry average of $248.26 million.

Over the past three and five years, its revenue grew at CAGRs of 6.2% and 6.5%, respectively. Its net income grew at a 21.6% CAGR over the past five years.

BAESY’s sales for six months that ended June 30, 2023, increased 13.6% year-over-year to £12.02 billion ($14.62 billion). Its underlying EBIT rose 13.1% year-over-year to £1.26 billion ($1.53 billion). Its operating profit increased 19.9% year-over-year to £1.23 billion ($1.50 billion). The company’s profit for the period increased 55.3% year-over-year to £1.01 billion ($1.22 billion).

Additionally, the company’s EPS increased 62.2% from the prior-year period to 31.8p. Also, its net cash flow from operating activities increased 201% year-over-year to £1.48 billion ($1.81 billion).

Analysts expect BAESY’s revenue and EPS for the fiscal year ending December 2023 to increase 7.7% and 19.9% year-over-year to $30.12 billion and $3.20, respectively.

Over the past year, the stock has gained 46.1% to close the last trading session at $52.93. The stock gained 25.6% year-to-date.

BAESY’s POWR Ratings reflect strong prospects. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system.

It has an A grade for Stability and a B for Value and Momentum. It is ranked #3 within the same industry.

To see BAESY’s Growth, Sentiment, and Quality ratings, click here.

Stock #1: CPI Aerostructures, Inc. (CVU)

CVU engages in the contract production of structural aircraft parts for fixed-wing aircraft and helicopters in the commercial and defense markets.

On October 12, CVU delivered its first B-52 Radar Rack Structure to Raytheon, an RTX business under an IDIQ contract signed in late 2021 with a ceiling value of $20 million.

Under the contract's first phase, CVU is building and delivering nine development units and two spares and completing the tooling and other non-recurring engineering efforts. Deliveries of the remaining rack structures will continue into 2024 and should bode well for CVU.

CVU’s trailing-12-month net income margin of 12.47% is 101.4% higher than the 6.19% industry average. Likewise, its 16.36% trailing-12-month ROCE is 998.53%, significantly higher than the 13.54% industry average.

Over the past three and five years, its revenue grew at CAGRs of 1.9% and 2.5%, respectively. Its net income grew at a 91% CAGR over the past five years.

CVU’s revenue for the fiscal second quarter that ended June 30, 2023, increased 8.6% year-over-year to $20.55 million. The company’s gross profit increased 25.8% year-over-year to $4.60 million.

Its net income stood at $1.16 million, up 123.6% year-over-year, while income per common share came in at $0.09, up 125% from the prior-year quarter. As of June 30, 2023, its total current assets stood at $45.19 million, compared to $43.20 million as of December 31, 2022.

Over the past year, the stock has gained 92.1% to close the last trading session at $3.15. The stock gained 4% over the past month.

It’s no surprise that CVU has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

It has an A grade for Value and a B for Growth, Momentum, and Sentiment. It is ranked first in the Air/Defense Services industry.

Click here to see the additional POWR Ratings for CVU (Stability and Quality).

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RGR shares were trading at $54.62 per share on Thursday afternoon, down $0.47 (-0.85%). Year-to-date, RGR has gained 10.09%, versus a 12.92% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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