In the United States, military spending is considered the second-largest allocation in the federal budget after social security. Also, the rise of ongoing political tensions with China and Russia and planned procurements of advanced military equipment to replace the aging equipment currently in service are expected to accelerate the defense market's growth.
Therefore, I think quality defense stocks TransDigm Group Incorporated (TDG), Ducommun Incorporated (DCO), and Astronics Corporation (ATRO) might be ideal buys to capitalize on the industry tailwinds.
The defense industry remained stable through 2022 and is expected to outperform the commercial aerospace segment as an increase in defense budgets in the wake of the invasion is boosting demand for military equipment globally.
The United States Defense market is expected to grow at a CAGR of 0.67% to reach $646.83 billion by 2031.
In addition, the defense industrial base across the U.S. geared up to ramp-up production rates over the near term to refill depleting stockpiles of munitions, missiles & weapons following the rapid pace at which they were being used in Ukraine and to meet growing international orders.
Thus, global defense spending is projected to reach a record $2.50 trillion by 2027 as the industry prepares to ramp up production rates to unprecedented rates.
Take a look at the stocks mentioned above:
TransDigm Group Incorporated (TDG)
TDG designs, produces, and supplies aircraft components in the United States and internationally.
On May 8, TDG announced it had successfully completed its acquisition of Calspan Corporation for approximately $725 million in cash, including certain tax benefits. TDG financed the purchase through cash on hand.
TDG’s forward non-GAAP PEG of 1.37x is 16% lower than the industry average of 1.63x.
During the fiscal first quarter that ended April 1, 2023, TDG net sales increased 20% year-over-year to $1.59 billion. Its net income increased 52.8% year-over-year to $304 million. Also, its non-GAAP EPS increased 57.4% year-over-year to $5.98.
TDG’s EPS is expected to increase 31.7% year-over-year to $6.39 for the fiscal third quarter ending June 2023. The company’s revenue for the same quarter is expected to increase 20.6% year-over-year to $1.69 billion. Also, it has surpassed EPS estimates in each of the trailing four quarters, which is impressive.
Shares of TDG have gained 42.7% over the past year to close the last trading session at $806.40.
TDG’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.
The stock has a B grade for Growth and Quality. It is ranked #17 out of 71 stocks in the Air/Defense Services industry.
Beyond what is stated above, we’ve also rated TDG for Stability, Value, Momentum, and Sentiment. Get all TDG ratings here.
Ducommun Incorporated (DCO)
DCO provides engineering and manufacturing products and services primarily to the aerospace and defense, industrial, medical, and other industries in the United States. The company operates through two segments, Electronic Systems, and Structural Systems.
On April 25, 2023, DCO announced the completion of its acquisition of BLR Aerospace, LLC (BLR) through its subsidiary, Ducommun LaBarge Technologies, Inc.
Stephen G. Oswald, chairman, President, and CEO of DCO, said, “BLR’s product offerings further strengthens our engineered products portfolio at the company and adds as well very important aftermarket business.”
DCO’s forward EV/Sales of 1.23x is 27.8% lower than the industry average of 1.70x. Its forward P/S multiple of 0.88 is 33.4% lower than the industry average of 1.32.
DCO's net revenues increased 10.8% year-over-year to $181.91 million in the fiscal first quarter that ended April 1, 2023. Its gross profit increased 13.2% year-over-year to $36.77 million. Also, its adjusted EBITDA increased 15% year-over-year to $23.08 million. Adjusted EPS came in at $0.63.
Street expects DCO’s revenue to increase 8% year-over-year to $188.14 million for the fiscal second quarter ending June 2023. The company’s EPS for the same quarter is expected to be $0.55. Also, it has surpassed revenue estimates in each of the trailing four quarters.
The stock has gained 1.9% over the past nine months to close the last trading session at $46.13.
DCO’s robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
DCO has a B grade for Growth and Value. It is ranked #18 in the same industry.
Click here to see the additional POWR Ratings for DCO (Sentiment, Stability, Quality, and Momentum).
Astronics Corporation (ATRO)
ATRO designs and manufactures products for the aerospace, defense, and electronics industries globally. The company operates in two segments, Aerospace and Test Systems.
ATRO’s forward EV/Sales of 1.16x is 31.4% lower than the industry average of 1.70x. Its forward P/S multiple of 0.89 is 32.4% lower than the industry average of 1.32.
ATRO’s sales increased 34.7% year-over-year to $156.54 million in the fiscal first quarter, which ended April 1, 2023. Gross profit increased 38% year-over-year to $27.51 million, and its adjusted EBITDA increased 540.5% year-over-year to $6.08 million.
Analysts expect ATRO’s revenue to increase 29.4% year-over-year to $167.08 million for the fiscal second quarter ending June 2023. Also, it has surpassed revenue estimates in each of the trailing four quarters.
The stock has gained 91.7% over the past nine months to close the last trading session at $18.04.
ATRO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
ATRO also has a B grade for Growth and Sentiment. It is ranked #20 in the same industry.
To access additional ratings for ATRO’s Value, Momentum, Stability, and Quality, click here.
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TDG shares were trading at $805.73 per share on Tuesday morning, down $0.67 (-0.08%). Year-to-date, TDG has gained 27.96%, versus a 14.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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