The defense industry is experiencing substantial growth due to increased military conflicts worldwide, evolving security threats, ongoing military modernization efforts by nations, higher defense spending, and technological advancements.
Given the industry’s long-term growth prospects, it could be wise to buy fundamentally strong defense stocks: Astronics Corporation (ATRO), Lockheed Martin Corporation (LMT), and Huntington Ingalls Industries, Inc. (HII), which are trading at a discount. These stocks are top-rated in our proprietary POWR Ratings system.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the defense industry’s prospects.
Increasing defense spending by developed and emerging nations presents significant growth opportunities for defense firms, with countries emphasizing military readiness. Geopolitical tensions and changing warfare dynamics, such as conflicts like those in Ukraine and between Israel and Hamas are further boosting the industry's prospects.
The U.S. Congress approved the historic National Defense Authorization Act (NDAA), which authorizes $886 billion in annual military spending, marking a 3% increase to the nation’s total national security budget. Also, the Defense Department's $849.8 billion budget request for FY 2025 shows proactive planning aligned with the Fiscal Responsibility Act, prioritizing national defense and global security.
The Air Force's budget request for fiscal 2024 is $215.10 billion, marking a $9.3 billion or 4.5% increase from 2023. Furthermore, the defense industry is expanding due to increased military aid, exemplified by the United States’ recent $300 million package to Ukraine.
International support and recognition of geopolitical dynamics are fostering collaboration, driving demand for defense equipment, and creating opportunities for industry expansion and innovation.
Strong air defense systems are more crucial than ever, given the increasing complexities of air warfare and ever-evolving security threats. The aerospace and defense market is forecasted to grow at a 5.9% CAGR, reaching a market size of $1.08 trillion by 2027.
Moreover, technological advancements are enhancing modern warfare through improved integration of radar, artificial intelligence, and analytics in missile and air defense systems. The use of AI and robotics in the aerospace and defense market is projected to rise from $31.90 billion in 2024 to $45.80 billion in 2029, growing at a 7.5% CAGR.
In light of this context, let’s analyze the fundamentals of the three Air/Defense Services picks, beginning with the third choice.
Stock #3: Astronics Corporation (ATRO)
ATRO and its subsidiaries design and manufacture products for the aerospace, defense, and electronics industries internationally. The company operates in two segments: Aerospace and Test Systems.
In terms of forward EV/Sales, ATRO’s 1.03x is 42% lower than the 1.78x industry average. Its 8.31x forward EV/EBITDA is 27.4% lower than the 11.45x industry average. Likewise, its 15.32x forward EV/EBIT is 2.4% lower than the 15.70x industry average.
For the fourth quarter ended December 31, 2023, ATRO’s sales increased 23.5% year-over-year to $195.29 million. The company’s gross profit rose 85.8% year-over-year to $39.97 million. Its adjusted EBITDA stood at $24.83 million, up 218.3% over the prior-year quarter.
For the same quarter, its net income and EPS came in at $6.98 million and $0.20, compared to a net loss and loss per share of $6.78 million and $0.21 in the year-ago quarter, respectively.
Street expects ATRO’s revenue for the quarter ending March 31, 2024, to increase 10.7% year-over-year to $173.27 million. Likewise, its EPS for fiscal 2025 is expected to increase 173.3% year-over-year to $1.23. Over the past year, the stock has gained 32.8% to close the last trading session at $17.41.
ATRO’s bright prospects are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #12 out of 72 stocks in the Air/Defense Services industry. It has a B grade for Growth, Value, Momentum, and Sentiment. In addition to the POWR Ratings grades I’ve just highlighted, you can see ATRO’s ratings for Stability and Quality, here.
Stock #2: Lockheed Martin Corporation (LMT)
LMT is a security and aerospace company that engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide. The company operates through Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space segments.
On March 7, 2024, LMT announced the successful demonstration of its Extended-Range GMLRS rockets, doubling their range and precision in a test by the U.S. Army at White Sands Missile Range, New Mexico. This moves ER GMLRS closer to production, emphasizing LMT’s dedication to advanced munitions capabilities.
On March 6, 2024, LMT was awarded a $219 million contract by the U.S. Army to produce more Precision Strike Missiles (PrSM). This is the fourth production contract for the long-range surface-to-surface missile. This contract will significantly increase production capacity to meet the Army's demand for long-range precision fire capability.
In terms of forward non-GAAP P/E, LMT’s 16.76x is 9.4% lower than the 18.50x industry average. Its 1.77x forward EV/Sales is 0.5% lower than the 1.78x industry average. In addition, its 14.72x forward EV/EBIT is 6.2% lower than the 15.70x industry average.
LMT’s net sales for the fiscal fourth quarter that ended December 31, 2023, came in at $18.87 billion. Likewise, the company’s non-GAAP net earnings stood at $1.94 billion, while its non-GAAP EPS increased 1.4% year-over-year to $7.90. Its cash from operations rose 22.7% year-over-year to $2.37 billion. Moreover, the company’s free cash flow grew 34.5% from the prior year’s period to $1.66 billion, respectively.
Analysts expect LMT’s revenue for the quarter ending March 31, 2024, to increase 4.7% year-over-year to $15.84 billion. Its EPS for the fiscal 2025 is expected to increase 6.3% year-over-year to $27.62. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past month, the stock has gained 4.2% to close the last trading session at $435.77.
LMT’s POWR Ratings reflect strong prospects. It has an overall rating of B, translating to a Buy in our proprietary rating system.
It has a B grade for Value, Momentum, Stability, Sentiment, and Quality. It is ranked #7 in the same industry. To see LMT’s Growth rating, click here.
Stock #1: Huntington Ingalls Industries, Inc. (HII)
HII designs, builds, overhauls, and repairs military ships in the United States. It operates through three segments: Ingalls, Newport News, and Mission Technologies. The company offers a range of ships, including amphibious assault, surface combatants, national security cutters, aircraft carriers, and submarines.
On March 13, 2024, HII announced an order to build a REMUS 620 unmanned underwater vehicle for an international customer in the Indo-Pacific Region. The customized UUV, to be delivered in 2024, will support monitoring and data collection missions with its advanced capabilities.
On March 12, 2024, HII’s Mission Technologies announced the new REMUS 130 unmanned underwater vehicle (UUV) with enhanced features for versatile underwater operations. The REMUS 130 offers maximum flexibility, advanced capabilities, and reduced cost, showcasing HII's commitment to innovative unmanned solutions.
In terms of forward Price/Sales, HII’s 0.98x is 33.2% lower than the 1.46x industry average. Its 17.43x forward non-GAAP P/E is 5.8% lower than the 18.50x industry average. Also, its 1.17x forward EV/Sales is 34% lower than the 1.78x industry average.
For the fourth quarter that ended December 31, 2023, HII’s sales and service revenues increased 13% year-over-year to $3.18 billion. Its segment operating income rose 127.6% from the year-ago value to $330 million. Moreover, the company’s net earnings rose 122.8% and 124.8% year-over-year to $274 million and $6.90 per share, respectively.
For the quarter ending March 31, 2024, HII’s EPS and revenue are expected to increase 8.5% and 3.9% year-over-year to $3.50 and $2.78 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, HII’s stock has gained 37.7% to close the last trading session at $286.87.
HII’s solid prospects are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It is ranked first in the Air/Defense Services industry. It has a B grade for Value, Momentum, and Stability. In addition to the POWR Ratings grades I’ve just highlighted, one can check HII’s ratings for Growth, Sentiment, and Quality, here.
What To Do Next?
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LMT shares were unchanged in premarket trading Friday. Year-to-date, LMT has declined -3.15%, versus a 8.08% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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