Escalating geopolitical tensions has prompted nations to heighten their vigilance, intensifying their efforts to strengthen military capabilities through substantial increases in defense budgets. Higher defense spending by governments will likely benefit defense companies.
Therefore, it could be wise to consider buying fundamentally strong defense stocks Brady Corporation (BRC), Cadre Holdings, Inc. (CDRE), and Willis Lease Finance Corporation (WLFC).
Before diving deeper into the fundamentals of these stocks, let’s discuss why the defense industry is expected to perform well.
Wars have far-reaching impacts on the global economy and human lives. We live in a highly polarized world where wars and conflicts are becoming ordinary and regular. Conflicts persist in Ukraine, Israel and various other geopolitical flashpoints across the globe. Recently, Houthi attacks on cargo ships in the Red Sea have stoked fears of a broader Middle Eastern conflict.
These military flashpoints will likely be growth drivers for aerospace and defense companies. The global aerospace and defense market is projected to grow at a CAGR of 5.9% to reach $1.08 trillion. Investors’ interest in aerospace and defense stocks is evident from the iShares U.S. Aerospace & Defense ETF’s (ITA) 19.7% returns over the past three months.
Additionally, aerospace and defense (A&D) companies are adopting advanced technologies in order to reduce costs and achieve higher efficiency. These advanced technologies are helping them create more resilient supply chains, mitigate logistical issues and create new products.
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: Brady Corporation (BRC)
BRC manufactures and supplies identification solutions (IDS) and workplace safety (WPS) products to identify and protect premises, products, and people. The company offers materials, printing systems, RFID, and bar code scanners for product identification, brand protection labeling, work-in-process labeling, finished product identification, industrial track and trace applications, safety signs, floor-marking tapes, pipe markets, etc.
BRC’s revenue grew at a CAGR of 7.8% over the past three years. Its EBITDA grew at a CAGR of 14.5% over the past three years. In addition, its EPS grew at a CAGR of 21.8% in the same time frame.
BRC’s net sales for the fiscal first quarter ended October 31, 2023, increased 2.9% year-over-year to $331.98 million. Its operating income rose 16.2% over the prior-year quarter to $59.73 million. The company’s net cash provided by operating activities increased 122.4% year-over-year to $62.27 million.
Its non-GAAP net income rose 16.2% year-over-year to $49.05 million. Also, its non-GAAP EPS stood at $1, representing an increase of 19% year-over-year.
Analysts expect BRC’s EPS and revenue for the quarter ending January 31, 2024, to increase 15.2% and 4% year-over-year to $0.93 and $339.44 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 28.8% to close the last trading session at $61.26.
BRC’s POWR Ratings reflect this positive outlook. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #4 out of 73 stocks in the Air/Defense Services industry. It has an A grade for Quality and a B for Stability. Click here to see the additional ratings of BRC for Growth, Value, Momentum, Stability, and Sentiment.
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. It offers body armor products, survival suits, remotely operated vehicles, specialty tools, blast sensors, accessories, vehicle blast attenuation seats, bomb suits, duty gear, etc.
On December 22, 2023, CDRE announced that it entered into a definitive agreement to acquire ICOR Technology Inc. CDRE’s Chairman and CEO Warren B. Kanders said, “We are pleased to enter into the agreement to acquire ICOR, meeting our established M&A criteria. With a leading market position, high margins, compelling macroeconomic trends, and resiliency through cycles, ICOR is an ideal add-on to Cadre’s EOD business.”
“Importantly, the addition of ICOR will meaningfully expand our ability to provide mission-critical EOD robots to law enforcement agencies and military organizations, which is an area that we are intimately familiar and support by anticipated strengthening tailwinds,” he added.
CDRE’s revenue grew at a CAGR of 2.9% over the past three years.
For the fiscal third quarter that ended September 30, 2023, CDRE’s net sales increased 12.2% year-over-year to $125.11 million. Its adjusted EBITDA rose 14.4% over the prior-year quarter to $23.73 million. The company’s gross profit increased 22.5% year-over-year to $53.60 million. In addition, its net income rose 123.7% year-over-year to $11.05 million. Also, its EPS came in at $0.29, representing an increase of 123.1% year-over-year.
For the quarter ended December 31, 2023, CDRE’s EPS is expected to increase 9.6% year-over-year to $0.20. Its revenue for the quarter ending March 31, 2024, is expected to increase 5.8% year-over-year to $118.22 million. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 60.5% to close the last trading session at $32.33.
CDRE’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
It is ranked #3 in the same industry. It has an A grade for Quality and a B for Momentum, Stability, and Sentiment. To see the other ratings of CDRE for Growth and Value, click here.
Stock #1: Willis Lease Finance Corporation (WLFC)
WLFC operates as a lessor and servicer of commercial aircraft and aircraft engines worldwide. The company operates through two segments: Leasing and Related Operations and Spare Parts Sales. It also focuses on engine management and consulting business. It serves commercial aircraft operators, as well as maintenance, repair, and overhaul organizations.
WLFC’s revenue grew at a CAGR of 7.5% over the past three years. Its EBIT grew at a CAGR of 6.3% over the past three years. In addition, its net income grew at a CAGR of 38.8% in the same time frame.
WLFC’s total revenue for the third quarter ended September 30, 2023, increased 37.5% year-over-year to $105.75 billion. Its net income attributable to common shareholders rose 148.3% over the prior-year quarter to $13.78 million. The company’s income from operations increased 128.7% year-over-year to $19.99 million. Also, its EPS came in at $2.13, representing an increase of 139.3% year-over-year.
Street expects WLFC’s EPS to increase 15% per annum over the next five years. Over the past six months, the stock has gained 22.5% to close the last trading session at $47.94.
WLFC’s POWR Ratings reflect solid prospects. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
It is ranked first in the Air/Defense Services industry. It has a B grade for Growth, Value, Momentum, Sentiment, and Quality. Click here to check WLFC’s rating for Stability.
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 Wednesday. Year-to-date, BRC has gained 4.38%, versus a -0.86% 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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