Aerospace and defense stocks have attracted increased investor interest following a surprise attack by the Hamas militant group on Israeli villages and communities on October 7. In response, Israel declared war, initiating a multi-day aerial bombardment campaign and planning a ground assault while evacuating northern Gaza.
Given a new war and the industry’s growing prominence with countries worldwide increasing their defense budgets and consistent technological advancements, fundamentally sound stocks Sturm, Ruger & Company, Inc. (RGR), Cadre Holdings, Inc. (CDRE) and Brady Corporation (BRC) could be ideal additions to your portfolio for stable returns.
Before diving deeper into their fundamentals, let’s discuss what’s happening in the air defense industry.
According to a research note from BofA Securities, the conflict between Israel and Hamas could potentially increase investments in the Department of Defense. BofA predicts that the United States will provide munitions, missiles, and antimissile systems to support Ukraine and Israel. This assistance is expected to enhance the performance of major U.S. defense contractors.
Along with this tailwind, the aerospace and defense industry is steadily investing in artificial intelligence and robotics. AI is being used in maintenance, health monitoring, airport operations, and pilot training, making it an essential aspect of the airspace. The artificial intelligence and robotics market in aerospace and defense is estimated to reach $34.60 billion by 2029, growing at a 7.8% CAGR.
Moreover, according to the Aerospace & Defense Global Market Report 2022, the aerospace and defense market is expected to reach $1.05 trillion in 2026 at a CAGR of 8.5%. Investors’ interest in defense stocks is evident from the SPDR S&P Aerospace & Defense ETF’s (XAR) 6.1% returns year-to-date.
Considering these conducive trends, let’s look at the fundamentals of the three Air/Defense Services stock picks, beginning with number 3.
Stock #3: 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.
RGR’s forward EV/EBIT multiple of 11.15 is 13% lower than the industry average of 12.82. Its forward EV/EBITDA multiple of 8.13% is 10.8% lower than the industry average of 9.11.
RGR’s trailing-12-month ROTA of 17.10% is 339.1% higher than the 3.89% industry average. Its trailing-12-month levered FCF margin of 9.30% is 82.5% higher than the industry average of 5.10%.
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 and 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.
The consensus revenue estimate of 588.80 million for the year ending December 2024 represents a 3.7% increase year-over-year. Its EPS is expected to grow at 10.2% year-over-year to $3.89 for the same period. RGR’s shares have gained 13.8% over the past year to close the last trading session at $54.49.
RGR’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
RGR also has an A grade for Quality and a B for Value, Stability and Momentum. It is ranked #4 out of 70 stocks in the Air/Defense Services industry. Click here to see the additional POWR Ratings for Value, Sentiment, and Growth for RGR.
Stock #2: Cadre Holdings, Inc. (CDRE)
CDRE manufactures and distributes safety and survivability equipment that protects users in hazardous or life-threatening situations. The company operates in two segments: Products and Distribution.
CDRE’s trailing-12-month EBITDA margin of 16.02% is 18.4% higher than the 13.53% industry average. Its trailing-12-month gross profit margin of 41.43% is 36.5% higher than the 30.35% industry average.
CDRE’s net sales for the second quarter ended June 30, 2023, increased 2.4% year-over-year to $121.09 million. Its gross profit rose 17.4% year-over-year to $50.75 million. The company’s net income increased 147.3% year-over-year to $10.99 million.
Additionally, its EPS came in at $0.29, representing an increase of 141.7% year-over-year. Also, its adjusted EBITDA increased 24% year-over-year to $22.81 million.
Street expects CDRE’s revenue to increase 4.8% year-over-year to $479.69 million for the year ending December 2023. Its EPS is expected to grow at 166% year-over-year to $0.97 for the same period. Over the past nine months, the stock has gained 24.9% to close the last trading session at $27.43.
CDRE’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It is ranked #3 in the same industry. It has a B grade for Growth, Stability, Momentum and Quality. To see additional CDRE’s ratings for Value and Sentiment, click here.
Stock #1: Brady Corporation (BRC)
BRC is a manufacturer and supplier of identification solutions and workplace safety products that identify and protect premises, products, and people worldwide. The company operates through two segments: Identification Solutions (IDS) and Workplace Safety (WPS).
BRC’s forward non-GAAP PEG multiple of 1.49 is 8% lower than the industry average of 1.62. Its forward non-GAAP P/E multiple of 13.42% is 23.4% lower than the industry average of 17.51.
BRC’s trailing-12-month ROTA of 12.59% is 149.7% higher than the 5.04% industry average. Its trailing-12-month levered FCF margin of 12.99% is 129.6% higher than the 5.66% industry average.
For the fiscal fourth quarter that ended July 31, 2023, BRC’s net sales amounted to $345.93 million, up 6.8% year-over-year, while its gross margin grew 7.8% year-over-year to $175.88 million. Its operating income increased 17.3% from the prior-year quarter to $62.05 million. The company’s non-GAAP net income and EPS came in at $51.21 million and $1.04, up 16.8% and 23% year-over-year.
Analysts expect BRC’s revenue to increase 6.1% year-over-year to $1.41 billion for the year ending July 2024. Its EPS is expected to grow at 11% year-over-year to $4.04 for the same period. It surpassed EPS estimates in all four tailing quarters. The stock has gained 30.4% over the past year to close the last trading session at $54.73.
It’s no surprise that BRC has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has an A grade for Quality and a B for Sentiment and Growth. It is ranked #2 in the Air/Defense Services industry.
Beyond what is stated above, we’ve also rated BRC for Value, Stability and Momentum. Get all BRC ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
BRC shares were unchanged in premarket trading Tuesday. Year-to-date, BRC has gained 18.35%, versus a 14.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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