Geopolitical instability, highlighted by recent events like the Hamas assault on Israel, is driving increased attention to defense stocks. The evolving conflict landscape, marked by more complex and widespread disputes, is fueling demand for advanced and expensive defense equipment. Countries are responding to rising tensions by boosting defense spending, benefiting defense companies.
Amid this backdrop, it could be wise to wait for a better entry point in Airbus SE (EADSY). On the other hand, investors could look to buy fundamentally strong defense stocks MSA Safety Incorporated (MSA) and Lockheed Martin Corporation (LMT).
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the industry’s prospects.
Wars and conflicts are becoming more common due to different ideologies, political and economic interests, unresolved regional tensions, etc. On October 7, 2023, hostilities erupted between Israel and the militant group Hamas. More recently, Houthi attacks on cargo ships in the Red Sea have stoked fears of a broader Middle Eastern conflict.
As of today, wars are ongoing in Ukraine, Israel and Gaza, and several other geopolitical hotspots around the world. Conflicts are suitable for aerospace and defense businesses as countries spend a lot to strengthen their military capabilities. The global aerospace and defense market is projected to grow at a CAGR of 5.9% to reach $1.08 trillion.
Aerospace and defense companies are also benefiting from emerging technologies like artificial intelligence (AI) and machine learning. These technologies help enhance predictive maintenance in defense systems, helping forecast maintenance timelines accurately and reducing downtimes. Additionally, the introduction of 3D printing into production is helping create resilient supply chains and mitigate logistical issues.
Investors’ interest in aerospace and defense stocks is evident from the iShares U.S. Aerospace & Defense ETF’s (ITA) 19.5% returns over the past three months.
Considering these conducive trends, let’s take a look at the fundamentals of the three Air/Defense Services stock picks, starting with number 3.
Stock #3: Airbus SE (EADSY)
Headquartered in Leiden, the Netherlands, EADSY engages in the design, manufacture, and delivery of aerospace products, services, and solutions worldwide. It operates through three segments: Airbus, Airbus Helicopters, and Airbus Defence and Space.
On December 19, 2023, EADSY announced that it had secured a significant order from Lufthansa Group, with Lufthansa’s Supervisory Board approving the purchase of 40 additional A220-300s for its short and medium-haul fleet. The order strengthens EADSY's partnership with Lufthansa.
During the same month, EADSY announced that it had secured a €1.695 billion contract from the Spanish Ministry of Defence for 16 C295 aircraft in Maritime Patrol Aircraft (MPA) and Maritime Surveillance Aircraft (MSA) configuration.
In terms of the trailing-12-month net income margin, EADSY’s 6.35% is 3.8% higher than the 6.12% industry average. Likewise, its 37.10% trailing-12-month Return on Common Equity is 203.3% higher than the industry average of 12.23%. Furthermore, the stock’s 12.14% trailing-12-month Return on Total Capital is 73.1% higher than the industry average of 7.01%.
For the fiscal third quarter ended September 30, 2023, EADSY’s revenues increased 11.9% year-over-year to €14.90 billion ($16.30 billion). Its adjusted EBIT increased 21.2% year-over-year to €1.01 billion ($1.11 billion). The company’s profit for the period rose 20.2% over the prior-year quarter to €762 million ($833.74 million). Its EPS came in at $1.02, registering an increase of 20% year-over-year.
Street expects EADSY’s revenue for the quarter ended December 31, 2023, to increase 9.9% year-over-year to $24.22 billion. Its EPS for the quarter ending March 31, 2024, is expected to increase 38.8% year-over-year to $0.28. Over the past year, the stock has gained 24.2% to close the last trading session at $37.98.
EADSY’s bleak prospects are reflected in its POWR Ratings. It has an overall rating of C, which translates to a Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a C grade for Growth, Value, and Quality. It is ranked #32 of 74 stocks in the Air/Defense Services industry. In addition to the POWR Ratings highlighted above, you can see EADSY’s ratings for Momentum, Stability, and Sentiment here.
Stock #2: MSA Safety Incorporated (MSA)
MSA is engaged in the development, manufacture, and supply of safety products and software that protect people and facility infrastructures in the oil, gas, petrochemical, fire service, construction, industrial manufacturing applications, heating, ventilation, military, and mining industries. Its core product offerings include permanently installed fixed gas and flame detection instruments, breathing apparatus products, firefighter helmets, etc.
On December 6, 2023, MSA announced that it had secured a $35 million contract with the U.S. Air Force to supply advanced respiratory protective equipment, including the G1 Self-Contained Breathing Apparatus (SCBA) along with related facepieces, chemical warfare component masks, and supplied-air respirator kits, which enable the SCBA to be used as a longer-duration airline device.
The contract underscores MSA's commitment to innovation, featuring breakthrough features in the G1 platform, and is expected to positively impact MSA's business as production and deliveries continue into 2024.
In terms of the trailing-12-month gross profit margin, MSA’s 46.74% is 54.4% higher than the 30.28% industry average. Likewise, its 22.76% trailing-12-month EBIT margin is 132.1 higher than the industry average of 9.81%. Furthermore, the stock’s 26.19% trailing-12-month EBITDA margin is 90.9% higher than the industry average of 13.72%.
MSA’s net sales for the fiscal third quarter that ended September 30, 2023, increased 17% year-over-year to $446.73 million. Its adjusted EBITDA increased 32.1% over the prior year quarter to $114.49 million. The company’s adjusted earnings rose 23% year-over-year to $70.15 million. Also, its adjusted EPS came in at $1.78, registering an increase of 22.8% over the prior-year quarter.
Analysts expect MSA’s revenue and EPS for the quarter ended December 31, 2023, to increase 5.5% and 4.1% year-over-year to $467.52 million and $1.87, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters, which is impressive. Over the past nine months, the stock has gained 24.9% to close the last trading session at $163.73.
MSA’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Sentiment and a B for Momentum and Quality. Within the same industry, it is ranked #16. Click here to see the other ratings of MSA for Growth, Value, and Stability.
Stock #1: 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. It operates through four segments: Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space.
On December 11, 2023, LMT announced that it had delivered the first Precision Strike Missiles (PrSM) to the U.S. Army, providing long-range fire capability and, achieving a significant modernization milestone and meeting the Army's Early Operational Capability.
The accelerated development and successful delivery enhance LMT's position as a critical contributor to the U.S. Army's long-range precision fire capabilities, positively impacting its business in the defense sector.
On November 14, 2023, LMT announced the opening of the $16.5 million engineering facility at its Huntsville campus, introducing more capabilities for missile defense innovation in North Alabama. This facility will serve as a testbed for its hardware and software integration, adding new levels of digital capability, agility and connectivity with its customers.
In terms of the trailing-12-month levered FCF margin, LMT’s 6.79% is 13.5% higher than the 5.98% industry average. Likewise, its 12.29% trailing-12-month Return on Total Assets is 146.4% higher than the industry average of 4.99%. Furthermore, the stock’s 1.25x trailing-12-month asset turnover ratio is 55.6% higher than the industry average of 0.80x.
For the fiscal third quarter that ended September 24, 2023, LMT’s net sales increased 1.8% year-over-year to $16.88 billion. Its gross profit stood at $2.05 billion. The company’s adjusted net earnings and adjusted EPS came in at $1.70 billion and $6.77, respectively.
For the quarter ending March 31, 2024, LMT’s revenue is expected to increase 4% year-over-year to $15.73 billion. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 14.1% to close the last trading session at $457.87.
It’s no surprise that LMT has an overall rating of B, which translates to a Buy in our POWR Ratings system.
It has a B grade for Momentum, Stability, and Quality. It is ranked #11 within the Air/Defense Services industry. To see the other ratings of LMT for Growth, Value, and Sentiment, click here.
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EADSY shares were trading at $38.10 per share on Friday afternoon, up $0.12 (+0.32%). Year-to-date, EADSY has declined -1.22%, versus a -1.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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