The defense sector is poised to witness robust growth in the upcoming years, owing to the rising investments in advanced technologies and growing geopolitical tensions bolstering the demand for defense weapons.
Given this backdrop, investors could consider buying quality defense stocks such as MSA Safety Incorporated (MSA), Textron Inc. (TXT), and General Dynamics Corporation (GD), given their bullish sentiment. Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the defense industry’s prospects.
Over the past few years, a continual uptick in military expenditure has been observed as countries shore up their defense capabilities. The U.S. Department of Defense has requested a budget of nearly $850 billion for fiscal 2025, about 1% higher than this year’s budget request.
This rise in defense spending by nations around the world can be attributed to the mounting geopolitical turmoil around the world, as evidenced by the ongoing Russia-Ukraine war, tensions in the South China Sea, hostilities between Israel and Iran, and Israel’s war on Gaza.
Modern warfare has evolved, and aerial supremacy has become popular. This has driven the demand for surface-to-air missiles, drones, fighter jets, lasers, etc. The U.S. aerospace and defense market is projected to reach $656.93 billion by 2029, growing at a 5.8% CAGR.
In light of these encouraging trends, let's examine the fundamentals of the three Air/Defense Services stock picks, starting with the third in line.
Stock #3: MSA Safety Incorporated (MSA)
MSA develops, manufactures, and supplies safety products and technology solutions that protect people and facility infrastructures in the fire service, energy, utility, construction, and industrial manufacturing applications, as well as heating, ventilation, air conditioning, and refrigeration industries worldwide.
On April 17, 2024, MSA launched the MSA Cairns 1836 Fire Helmet in North America. This new helmet is one of the lightest traditional-style fire helmets available. It has a lower ride height for better comfort and features a patent-pending slide-lock system for easier maintenance.
MSA’s trailing-12-month asset turnover ratio of 0.83x is 5.4% higher than the industry average of 0.79x. Likewise, its trailing-12-month EBIT margin and levered FCF margin of 22.95% and 19.51% are 124.1% and 200.4% higher than the industry averages of 10.24% and 6.50%, respectively.
MSA’s net sales for the fiscal first quarter that ended March 31, 2024, increased 3.8% year-over-year to $413.30 million. Its gross profit rose 7.8% from the year-ago quarter to $195.53 million. The company’s adjusted earnings stood at $63.50 million, up 18.2% over the prior-year quarter. Also, its adjusted earnings per share increased 18.4% from the year-ago quarter to $1.61.
Analysts expect MSA’s revenue and EPS for the quarter ending June 30, 2024, to increase 2.8% and 5.7% year-over-year to $459.80 million and $1.94, respectively. The company surpassed Street EPS estimates in each of the trailing four quarters, which is impressive. Over the past year, the stock has gained 31.4%, closing the last trading session at $187.63.
The stock is trading above its 100-day and 200-day moving averages of $181.15 and $173.78, respectively.
MSA’s POWR Ratings reflect this positive outlook. It has an overall rating of B, 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.
MSA has a B grade for Quality. It is ranked #12 out of 72 stocks in the Air/Defense Services industry. Click here to see MSA’s ratings for Growth, Value, Momentum, Stability, and Sentiment.
Stock #2: Textron Inc. (TXT)
TXT operates in the aircraft, defense, industrial, and finance businesses worldwide. It operates through six segments: Textron Aviation, Bell, Textron Systems, Industrial, Textron eAviation, and Finance.
On May 27, 2024, TXT announced advanced Garmin G5000 avionics enhancements in the best-selling mid-size business jets, the Cessna Citation Latitude and the Citation Longitude. TXT’s investments in the popular business jets will offer pilots greater performance and improved user experience in the new Latitude jets beginning in 2025 and the new Longitude jets in 2026.
On May 20, 2024, TXT announced that the Federal Aviation Administration (FAA) granted certification of a new Combi interior conversion option for the Cessna SkyCourier turboprop aircraft. The Combi option enables operators to transport nine passengers and cargo simultaneously. Deliveries and the Combi option are expected to begin later this year.
This additional option enables customers to further use it in global markets, including government agencies, law enforcement and militaries, corporations, and humanitarian organizations.
TXT’s trailing-12-month net income margin of 6.75% is 11.8% higher than the industry average of 6.04%. Similarly, its trailing-12-month Return on Common Equity and Return on Total Capital of 13.37% and 7.44% are 8.5% and 4.7% higher than the industry averages of 12.32% and 7.11%, respectively.
For the fiscal first quarter that ended March 30, 2024, TXT’s total revenues stood at $3.14 billion, up 3.7% year-over-year. For the same quarter, its adjusted net income and net income per share increased 6.9% and 14.3% from the year-ago quarter to $233 million and $1.20, respectively.
As of March 30, 2024, TXT’s total liabilities amounted to $9.48 billion, compared to $9.87 billion as of December 30, 2023.
Street expects TXT’s EPS and revenue for the quarter ending June 30, 2024, to increase 2.7% and 3.9% year-over-year to $1.50 and $3.56 billion, respectively. The company surpassed consensus EPS estimates in three of the trailing four quarters. TXT has gained 42.3% over the past year, closing the last trading session at $88.63.
The stock is trading above its 10-day and 200-day moving averages of $88.41 and $82.75, respectively.
TXT’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 a B grade for Value, Momentum, and Quality. It is ranked #8 in the same industry. Get TXT’s Growth, Stability, and Sentiment ratings here.
Stock #1: General Dynamics Corporation (GD)
GD operates as an aerospace and defense company worldwide. It operates through four segments: Aerospace, Marine Systems, Combat Systems, and Technologies.
On May 17, 2024, GD’s General Dynamics Information Technology announced a $185 million task order to provide global cybersecurity services for the U.S. Air Force Civil Engineer Center, securing industrial control systems at 188 installations worldwide.
On May 15, 2024, GD’s Gulfstream Aerospace Corp. announced that the Gulfstream G700 received European Union Aviation Safety Agency (EASA) type certification, enabling increased international deliveries.
GD’s trailing-12-month asset turnover ratio of 0.80x is 2.2% higher than the industry average of 0.79x. Its trailing-12-month Return on Common Equity and Return on Total Assets of 16.71% and 6.13% are 35.6% and 26.3% higher than the industry averages of 12.32% and 4.85%, respectively.
GD’s revenue for the fiscal first quarter that ended March 31, 2024, increased 8.6% year-over-year to $10.73 billion. The company’s operating earnings grew 10.4% from the year-ago quarter to $1.04 billion. In addition, its net earnings stood at $799 million and $2.88 per share, up 9.5% and 9.1% over the prior-year quarter, respectively.
For the quarter ending June 30, 2024, GD’s revenue and EPS are expected to increase 14.9% and 24.3% year-over-year to $11.66 billion and $3.36, respectively. It surpassed consensus revenue estimates in each of the trailing four quarters. The stock has gained 45.1% over the past year to close the last trading session at $299.62.
The stock is trading above its 50-day and 200-day moving averages of $288.94 and $256.74, respectively.
GD’s POWR Ratings reflect its robust prospects. It has an overall B rating, equating to Buy in our proprietary rating system.
GD has a B grade for Momentum, Stability, and Sentiment. Within the Air/Defense Services industry, it is ranked #5. Click here for the additional POWR Ratings of GD (Growth, Value, and Quality).
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GD shares were trading at $299.28 per share on Tuesday morning, down $0.34 (-0.11%). Year-to-date, GD has gained 16.44%, versus a 11.70% 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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