With the rising geopolitical tensions, governments across the globe are increasing their defense budgets, boosting the prospects of the air defense sector. Moreover, increased adoption of advanced technologies should drive the industry’s growth and expansion.
Given the industry’s tailwinds, fundamentally sound air defense stocks Moog Inc (MOG.A), Sturm, Ruger & Company, Inc. (RGR), and Innovative Solutions and Support, Inc. (ISSC) could be ideal additions to your portfolio for solid returns.
Geopolitical rivalries coupled with the Arms Race and Deterrence among nations are the primary factors driving unprecedented budgetary allocations for the defense sector. In 2022, there was a 3.7% increase in world military spending, resulting in a new all-time high of $2240 billion.
Over the span of 2013 to 2022, there was a remarkable growth of 19% in global military expenditure, with a continuous annual rise starting from the year 2015. Russia’s invasion of Ukraine was a major driver of the growth in spending.
Moreover, last year, the U.S. maintained its position as the largest global military spender, allocating a staggering $877 billion, accounting for 39% of the world’s total military expenditure. This amount was three times greater than China, the second-largest spender.
Furthermore, for the fiscal year 2023, the Department of the Air Force requested a budget increase of 11.7% year-over-year to $194 billion. The Air Force and Space Force budgets of $169.50 billion and $24.50 billion reflected increases of $13.20 billion and $7.10 billion over last year’s requests, respectively.
According to a report by ReportLinker, the global aerospace & defense market is projected to reach $1.08 trillion in 2027, growing at a CAGR of 5.9%.
Several technological advancements have also considerably revolutionized the defense sector, enhancing the detection, precision, and response of various missile and air defense systems. Radar systems, AI-driven analytics, and missile tech ensure swifter threat identification and interception, bringing about a paradigm shift in modern warfare.
In addition, given its connectivity and real-time data exchange, the Internet of Things (IoT) helps the aerospace and defense sector achieve optimum operational efficiency with features, including predictive maintenance, data analytics, and smart surveillance.
As per a report by Precedence Research, the global IoT in aerospace & defense market size is expected to hit $255.90 billion by 2023, growing at a 19% CAGR.
Against this backdrop, fundamentally sound air defense stocks MOG.A, RGR, and ISSC could be worth adding to your investment portfolio. These stocks are rated B (Buy) in our POWR Ratings system.
Let’s delve deeper into the fundamentals of these stocks:
Moog Inc. (MOG.A)
MOG.A designs, manufactures, and integrates precise motion and fluid control systems for original equipment manufacturers (OEMs) and end users in the aerospace, defense, and industrial markets globally. The company operates in three segments: Aircraft Controls; Space and Defense Controls; and Industrial Systems.
On July 28, given a solid performance during the third quarter of 2023, the company raised its guidance for sales and adjusted earnings per share. MOG.A expects full-year 2023 net sales of $3.25 billion, up from the prior guidance of $3.25 billion. In addition, the company now expects an adjusted EPS of $5.75, compared to the previous guidance of $5.70.
On the same day, MOG.A announced a $0.27 per share quarterly dividend for both Class A and Class B common stockholders. The dividend, totaling around $9 million, will be paid on August 28, 2023, to shareholders on record by August 11, 2023.
MOG.A pays a $1.08 dividend annually, which translates to a yield of 0.94% at the current price. Its four-year average dividend yield is 1.22%. Also, the company’s dividend payouts have increased at CAGRs of 12.6% and 16.4% over the past three and five years, respectively.
For the third quarter of fiscal 2023, MOG.A’s net sales grew 10% from the year-ago value to $850.18 million, with increases across all three reporting segments. Its gross profit came in at $222.63 million, up 5.1% year-over-year. Also, the company’s operating profit rose 7.2% year-over-year to $86.58 million.
Analysts expect MOG.A’s revenue for the fiscal year (ending September 2023) to increase 7.1% year-over-year to $3.25 billion. Likewise, the consensus EPS estimate of $5.76 for the current year indicates a 3.6% rise year-over-year. Moreover, the company has topped the consensus revenue estimates in each of the trailing four quarters, which is impressive.
MOG.A’s stock has gained 15% over the past six months and 35.1% over the past year to close the last trading session at $115.14.
MOG.A’s POWR Ratings reflect this robust outlook. MOG.A has an overall rating of B, translating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MOG.A has a grade of B for Growth and Stability. It is ranked #8 out of 71 stocks in the Air/Defense Services industry.
Beyond what we stated above, we also have MOG.A’s ratings for Sentiment, Value, Momentum, and Quality. Get all MOG.A ratings here.
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.
On May 22, RGR introduced the Ruger LC Charger, a 5.7x28mm pistol with a 10.3” threaded barrel, ambidextrous safety, and a reversible magazine release.
Apart from offering low recoil and versatile applications, the pistol includes an M-LOK aluminum handguard, QD attachment points, and Picatinny rail for optics. Such advancements in the company’s product portfolio might drive its revenue stream and growth.
On April 11, RGR introduced an addition to the Ruger Mark IV 22/45 Lite pistols, featuring a Shield RMS footprint reflex optic mounting position, co-witness sights, and a ventilated rib on a clear anodized receiver.
With a .22LR cartridge, a 4.4-inch stainless steel barrel, and a 1911-style grip angle, it is the perfect weapon for target shooting, plinking, and competitive shooting, among others. This new product launch should bode well for the company.
For the second quarter that ended July 1, 2023, RGR’s net sales increased 1.6% year-over-year to $142.80 million. The company’s net firearms sales and net castings sales rose 1.4% and 28.2% year-over-year, respectively. Its net other income grew 98.9% from the year-ago value to $1.82 million.
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.
Analysts expect RGR’s revenue and EPS for the next fiscal year (ending December 2024) to increase 3.8% and 10.2% year-over-year to $588.80 million and $3.89, respectively. In addition, the company has surpassed the consensus revenue estimates in three of the trailing four quarters.
Shares of RGR have gained 3.8% over the past month and 4.7% year-to-date to close the last trading session at $54.46.
RGR’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system.
RGR has a grade A for Quality and a grade B for Value. It is ranked #9 among 71 stocks in the Air/Defense Services industry.
Click here to see the other ratings of RGR for Growth, Momentum, Stability, and Sentiment.
Innovative Solutions and Support, Inc. (ISSC)
ISSC is a systems integrator specializing in designing, manufacturing, and servicing air data equipment, cockpit display systems, and more for aviation retrofit and OEM applications. Its offerings include flight management systems, flat panel display systems, and global positioning system receivers. In addition, the company provides integrated standby units.
On March 4, ISSC secured a production order from Boeing to supply GPS Sensor Units for the Boeing (BA) T-7A Red Hawk trainer. The IS&S GPS/WAAS Beta-3 Receiver, compliant with FAA standards, computes aircraft position, velocity, and precise time while ensuring integrity via satellite signals.
The system’s integration into the T-7A Red Hawk will enhance training capabilities through virtual testing. Such orders are expected to boost ISSC’s growth and profitability.
ISSC’s net sales for the third quarter that ended June 30, 2023, rose 14.8% year-over-year to $7.96 million, and its gross profit was $4.70 million, an increase of 14.7% from the prior year’s quarter. Its income before income taxes was $1.76 million, up 2.6% year-over-year. In addition, the company’s net income rose 4.7% from the year-ago value to $1.42 million.
Street expects ISSC’s revenue for the fiscal year (ending September 2024) to increase 40.8% year-over-year to $45.20 million. The company’s EPS for the next fiscal year is expected to grow 66.7% year-over-year to $0.60.
Over the past month, the stock has gained 11.9% and 27.3% over the past three months to close the last trading session at $8.11.
ISSC’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
ISSC is ranked #10 among 71 stocks in the same industry. The stock has an A grade for Quality and Sentiment.
To see the other ratings of ISSC for Growth, Momentum, Stability, and Value, click here.
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MOG.A shares were unchanged in premarket trading Monday. Year-to-date, MOG.A has gained 32.25%, versus a 17.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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