Drone technology is soaring with advancements in the air defense sector and expanding commercial applications. Military drones, surveillance drones, and evolving intelligent sensory systems are making this sector highly promising for both commercial and military use.
Given this favorable backdrop, investing in defense stocks like AeroVironment, Inc. (AVAV), Kratos Defense & Security Solutions, Inc. (KTOS), and Lockheed Martin Corporation (LMT) could be a strategic move.
This year, driven by global conflicts, military modernization, and changing warfare dynamics, U.S. funding for AI-powered drones has surged. The focus on autonomous systems and the critical role of unmanned aerial vehicles are transforming defense. The military drone market, valued at $20.21 billion last year, is set to expand rapidly with a 12.21% CAGR.
Notably, the Air Force's CCA program is fueling excitement in drone tech by advancing AI-driven combat drones. This emphasis on drones in military operations boosts investment and innovation across both defense and commercial sectors. As a result, the US aerospace and defense market is projected to grow from $496.56 billion in 2024 to $656.93 billion by 2029, at a CAGR of 5.76%.
Furthermore, the commercial drone market is booming, driven by advancements in AI, and sensors, and expanding uses in agriculture, logistics, and more. With enhanced flight times and battery life, drones are revolutionizing aerial surveillance, data collection, and delivery services. The market is set to reach $1.18 trillion by 2033, growing at a 39.1% CAGR.
Therefore, let’s analyze the fundamentals of the three Air/Defense Services picks, beginning with the third choice.
Stock #3: AeroVironment, Inc. (AVAV)
AVAV designs, develops, produces, delivers, and supports a portfolio of robotic systems and related services for government agencies and businesses internationally. It operates through the UnCrewed Systems (UxS), Loitering Munition Systems (LMS), and MacCready Works (MW) segments.
On July 2, 2024, AVAV announced that the U.S. Department of State approved a $60.2 million foreign military sale of Switchblade 300 loitering munition systems to Taiwan. This sale aims to enhance Taiwan’s defense capabilities and supports U.S. interests in the Indo-Pacific region.
In terms of the trailing-12-month net income margin, AVAV’s 8.32% is 36.3% higher than the 6.11% industry average. Likewise, its 3.21% trailing-12-month Capex / Sales is 10.2% higher than the 2.91% industry average. Furthermore, its 5.87% trailing-12-month Return on Total Assets is 19.3% higher than the 4.92% industry average.
AVAV’s total sales for the fiscal fourth quarter ended April 30, 2024, amounted to $196.98 million, up 5.9% year-over-year. Similarly, its gross margin increased 10.6% from the year-ago quarter to $75.63 million. The company’s net income attributable to AVAV was $6.05 million, or $0.22 per share, compared to a net loss attributable to AVAV of $160.47 million, or $6.31 per share, respectively.
For the quarter ended July 31, 2024, AVAV’s revenue is expected to increase 22.5% year-over-year to $186.65 million. Its EPS for the quarter ending January 31, 2025, is expected to rise 44.8% year-over-year to $0.91. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 100.3% to close the last trading session at $187.24.
AVAV’s favorable outlook is reflected in its POWR Ratings. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Momentum. It is ranked #51 out of 70 stocks in the Air/Defense Services industry. Beyond what we stated above, we have also rated AVAV for Growth, Value, Stability, Sentiment, and Quality. Get all ratings of AVAV here.
Stock #2: Kratos Defense & Security Solutions, Inc. (KTOS)
KTOS operates as a technology company serving the defense, national security, and commercial markets. It operates through two segments: Kratos Government Solutions and Unmanned Systems.
On July 22, 2024, KTOS and GE Aerospace announced a partnership to develop and produce small, affordable engines for unmanned aerial systems and collaborative combat aircraft. This new Memorandum of Understanding aims to advance the development and full-scale production of these engines.
On June 27, 2024, KTOS announced the successful first flight of its Erinyes Hypersonic Test Bed, marking a significant advancement in U.S. high-speed experimental research. This achievement supports rapid hypersonic experimentation and data collection for the Missile Defense Agency and the Naval Surface Warfare Center.
KTOS’ trailing-12-month Capex / Sales of 5.58% is 91.7% higher than the industry average of 2.91%.
For the fiscal second quarter that ended June 30, 2024, KTOS’ total revenues increased 16.8% year-over-year $300.10 million. The company’s total gross profit stood at $77.20 million, up 20.8% from the year-ago quarter. Furthermore, its non-GAAP adjusted income from consolidated operations rose 81.8% and 55.6% over the prior-year quarter to $30 million and $0.14 per share.
Street expects KTOS’ revenue for the quarter ending September 30, 2024, to increase marginally year-over-year to $276.95 million. Its EPS for the quarter ending March 31, 2025, is expected to grow 1.3% year-over-year to $0.11. KTOS surpassed the consensus EPS estimates in each of the trailing four quarters. The stock has gained 37.1% over the past year to close the last trading session at $20.79.
KTOS’ bright prospects are reflected in its POWR Ratings. It is ranked #43 in the same industry. It has an A grade for Growth and a B for Momentum. In addition to the POWR Ratings grades I’ve just highlighted, you can see KTOS’ ratings for Value, Stability, Sentiment, and Quality, here.
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. The company operates through Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space segments.
On August 19, 2024, Sikorsky, an LMT company, delivered the 23rd and final VH-92A presidential helicopter to the U.S. Marine Corps. This completion marks the end of the VH-92A program, delivering the next-generation helicopters on budget and on schedule.
On August 15, 2024, LMT announced it will acquire Terran Orbital (LLAP) for approximately $450 million. This strategic acquisition aims to enhance LMT’s satellite manufacturing and space capabilities, leveraging Terran Orbital's advanced technology and modular space vehicle designs.
In terms of the trailing-12-month net income margin, LMT’s 9.48% is 55.2% higher than the 6.11% industry average. Likewise, its 21.42% trailing-12-month Return on Total Capital is 202% higher than the industry average of 7.09%. Also, LMT’s 1.27x trailing-12-month asset turnover ratio is 62.7% higher than the industry average of 0.78x.
LMT’s net sales for the fiscal second quarter ended June 30, 2024, grew 8.6% year-over-year to $18.12 billion. Similarly, its aeronautics net sales increased 5.8% year-over-year to $7.28 billion. For the same quarter, the company’s non-GAAP net earnings stood at $1.70 billion, while its non-GAAP EPS came in at $7.11, representing a 5.6% increase from the previous year.
Analysts expect LMT’s revenue for the quarter ending September 30, 2024, to increase 3.7% year-over-year to $17.51 billion. Its EPS for the quarter ending March 31, 2025, is expected to grow 4.7% year-over-year to $6.63. It surpassed consensus EPS estimates in each of the trailing four quarters. LMT’s stock has gained 31.3% over the past six months to close the last trading session at $557.01.
LMT’s POWR Ratings reflect strong prospects. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
It has a B grade for Momentum, Stability, Sentiment, and Quality. It is ranked #2 in the Air/Defense Services industry. To see LMT’s Growth and Value rating, click here.
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LMT shares were trading at $557.29 per share on Wednesday afternoon, up $0.28 (+0.05%). Year-to-date, LMT has gained 24.69%, versus a 18.53% 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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