The escalating geopolitical tensions, primarily due to the Russia-Ukraine war, induced momentum in air & defense stocks since the beginning of 2022. Moreover, the emerging threats from China as it eyes Taiwan should boost the performance of defense stocks.
Last month, the U.S. House of Representatives Armed Services Committee backed a proposal to increase defense spending by $37 billion, on top of the $773 billion proposed by the Biden Administration. Moreover, the United States is the world's largest arms exporter and is expected to benefit from the increased military budgets globally.
Given Russia’s full-scale invasion of Ukraine, Germany pledged to invest €100 billion ($102.14 billion) in defense spending. More European countries, including Belgium, Romania, Poland, Italy, Estonia, Latvia, Norway, Sweden, and Finland, increased their defense budgets for the fiscal year 2022.
Recently, Japan announced increasing its defense budget over the next five years. Britain’s Prime Minister, Boris Johnson, indicated boosting defense spending to 2.5% of its GDP by the end of this decade. The significant increase in military spending worldwide should benefit air & defense companies.
Given this backdrop, we think it could be wise to invest in fundamentally sound air & defense stocks Moog Inc. (MOG.A), Brady Corporation (BRC), and Sturm, Ruger & Company, Inc. (RGR).
Moog Inc. (MOG.A)
MOG.A designs, manufactures and integrates precision motion and fluid controls and control systems for original equipment manufacturers and end-users in the aerospace, defense, and industrial markets worldwide. The company operates through three segments: Aircraft Controls; Space and Defense Controls; and Industrial Systems.
On February 23, MOG.A completed the acquisition of Dublin, Ireland-based TEAM Accessories Limited. TEAM is an aerospace and industrial engineering business specializing in Maintenance, Repair, and Overhaul (MRO) with testing and repair services for airframe components and safety equipment.
TEAM’s core business is focused on high-value jet engine accessories used by commercial airlines and cargo carriers. This acquisition is expected to support Moog’s current Commercial Aftermarket service offerings and expand its global reach.
In the fiscal second quarter ended April 2, 2022, MOG.A's net sales increased 4.7% year-over-year to $770.79 million, and its gross profit grew 6.6% year-over-year to $213.01 million. Its adjusted EBIT rose 12.7% year-over-year to $63.45 million. The company's adjusted net earnings and adjusted net earnings per share came in at $47.94 million and $1.49, up 11.9% and 12%, respectively, from the prior-year period.
MOG.A's trailing-12-months levered FCF margin of 6.16% is 89.2% higher than the industry average of 3.26%. Its trailing-12-months Capex/Sales of 4.24% is 71.2% higher than the industry average of 2.89%.
The $768.68 million consensus revenue estimate for the fiscal 2022 third quarter ended June 2022 represents an 8.7% improvement from the same period in 2021. Analysts expect MOG.A’s EPS for the to-be-reported quarter to increase 28.6% year-over-year to $1.44
The stock has declined 3.4% year-to-date to close the last trading session at $78.26.
MOG.A's POWR Ratings reflect this promising outlook. It has an overall A grade, equating to a Strong 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 Quality, Stability, and Value. Within the Air/Defense Services industry, it is ranked #1 of 77 stocks. To see additional POWR Ratings (Growth, Momentum, and Sentiment) for MOG.A, click here.
Brady Corporation (BRC)
BRC manufactures and supplies identification solutions (IDS) and workplace safety (WPS) products in the United States and internationally. The company operates through two segments: Identification Solutions; and Workplace Safety. The company serves various industries, including aerospace, governments, industrial and electronic manufacturing, healthcare, chemical, telecommunications, and others.
On May 24, BRC’s Board of Directors authorized an additional $100 million of Class A Common Stock for repurchase under the company’s share buyback program, based on current share prices equating to nearly 2.2 million shares (approximately 4.5% of total outstanding shares). It might boost the company’s shareholder returns.
In March, BRC secured a license to Honeywell Global Shutter Barcode Technology. Honeywell’s patented global shutter technology has significant advantages, including improved motion tolerance, faster barcode reading, and versatility.
“We are thrilled to have been able to secure a license to Honeywell’s global shutter patent portfolio. Because of the global shutter technology, Brady’s industrial customers will be able to scan barcodes more efficiently and operate Brady’s products in a wider range of environments and situations,” said Russell Shaller, Present-Identification Solutions of Brady.
BRC's net sales increased 14.6% year-over-year to $338.55 million in the fiscal 2022 third quarter ended April 30, 2022. Its operating income rose 13.2% from the year-ago value to $52.89 million. In addition, the company’s net income and net income per common share came in at $40.05 million and $0.78, registering increases of 7.4% and 9.9%, respectively, year-over-year.
BRC's trailing-12-months gross profit margin of 47.97% is 62.6% higher than the industry average of 29.51%. Its trailing-12-month net income margin of 10.66% is 61.6% higher than the industry average of 6.60%.
The consensus revenue estimate of $337.45 million for fiscal 2022 fourth quarter ending July 2022 represents an increase of 10.2% from the prior-year period. The $0.83 consensus EPS estimate for the ongoing quarter indicates a 17.9% year-over-year rise. Furthermore, it has surpassed the consensus revenue estimates in each of the trailing four quarters, which is impressive.
BRC’s shares have gained 2.4% over the past three months and closed the last trading session at $46.34.
BRC’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall grade of B, translating to a Buy in our proprietary rating system.
BRC has a grade of A for Quality and B for Stability. Within the same industry, it is ranked #5 of 77 stocks. To see additional POWR Ratings (Growth, Value, Sentiment, and Momentum) for BRC, click here.
Sturm, Ruger & Company, Inc. (RGR)
RGR manufactures and sells firearms under the Ruger name and trademark in the United States. The company operates through two segments: Firearms; and Castings. The company sells its firearm products through independent wholesale distributors primarily to the commercial sporting market and castings and metal injection molding (MIM) parts directly or through manufacturers’ representatives.
In the fiscal 2022 first quarter ended April 2, 2022, RGR's net other income grew 82.5% year-over-year to $792,000. Its cash provided by operating activities amounted to $18.76 million, while cash provided by investing activities came in at $19.10 million.
As of April 2, 2022, the company’s cash and current assets came in at $41.59 million and $336.25 million, compared to $21.04 million and $328.73 million, respectively, as of December 31, 2021.
RGR's trailing-12-months EBITDA margin of 26.62% is 198.4% higher than the industry average of 8.92%. Its trailing-12-month net income margin of 20.75% is 218.1% higher than the industry average of 6.52%. Furthermore, its trailing-12-months ROTC of 35.35% compared with the industry average of 7.10%.
The stock has plunged 4.5% over the past month to close the last trading session at $63.51.
RGR's POWR Ratings reflect a strong outlook. The stock has an overall rating of B, which translates to a Buy in our POWR Ratings system.
RGR has a grade of A for Quality and B for Value. It is ranked #9 of 77 stocks in the same industry. Click here to see RGR's POWR Ratings for Sentiment, Growth, Stability, and Momentum.
MOG.A shares were trading at $80.02 per share on Thursday morning, up $1.76 (+2.25%). Year-to-date, MOG.A has declined -0.49%, versus a -17.81% 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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