The defense sector is well-positioned for future growth due to its innovation and adaptability, which leverage advanced technologies such as AI, cybersecurity, and autonomous systems. Moreover, the air defense industry is benefitting from rising geopolitical tensions, such as conflicts involving Israel-Hamas and Russia-Ukraine.
Given the industry’s growth prospects, fundamentally strong defense stocks Innovative Solutions and Support, Inc. (ISSC), General Dynamics Corporation (GD) and Elbit Systems Ltd. (ESLT) might be worth buying.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the defense industry.
Technological advancements, advanced weaponry systems, and global security concerns fuel demand for defense products and services.
The global digital aviation market is projected to reach $81.62 billion by 2030, with a CAGR of 10.3%. In the aviation industry, digital solutions are used in aircraft data systems, maintenance, and flight operations to provide airline operators with timely information, enable safe and efficient operations, and identify potential dangers using data analytics.
The global aerospace and aerospace industry is predicted to grow to a total of $1.39 trillion by 2030, increasing at a CAGR of 8.2%. The industry is experiencing more focus on new technologies and evolving business models and the push for more digital and operational efficiencies.
Moreover, Investors’ interest in defense stocks is evident from the SPDR S&P Aerospace & Defense ETF’s (XAR) 14.3% returns over the past three months.
Considering these conducive trends, let’s look at the fundamentals of the three Air/Defense Services stocks, starting with number three.
Stock #3: Innovative Solutions and Support, Inc. (ISSC)
ISSC is a systems integrator, designs, develops, manufactures, sells, and services flight guidance, autothrottles, and cockpit display systems in the United States and internationally.
ISSC’s trailing-12-month net income margin of 17.32% is 180.1% higher than the industry average of 6.18%. Its 22.32% trailing-12-month EBIT margin is 126.5% higher than the 9.85% industry average.
ISSC’s sales for the fiscal fourth quarter that ended on September 30, 2023, amounted to $12.99 million, up 78.9% year-over-year. The company’s net income and EPS came in at $2.63 million and $0.15, increased 64.5% and 66.7% year-over-year, respectively. Moreover, during the same period, gross profit increased 81.6% to $8.11 million.
ISSC’s shares have gained 19.7% over past nine months to close the last trading session at $8.14.
ISSC’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
ISSC has a B grade for Growth, Momentum, Sentiment and Quality. Within the Air/Defense Services industry, it is ranked #11 out of 72 stocks. To see additional POWR Ratings for Value and Stability for ISSC, click here.
Stock #2: General Dynamics Corporation (GD)
GD operates as an aerospace and defense company worldwide. It operates through four segments: Aerospace; Marine Systems; Combat Systems; and Technologies.
GD’s trailing-12-month ROTA of 6.17% is 24.6% higher than the industry average of 4.95%. Its trailing-12-month ROCE of 17.56% is 43.4% higher than the industry average of 12.25%.
During the fiscal third quarter that ended October 1, 2023, GD’s revenue increased 6% year-over-year to $10.57 billion, while operating earnings stood at $1.06 billion. Moreover, its free cash flow increased 6.4% from the prior-year quarter to $1.09 billion. Its net earnings and EPS stood at $2.31 billion and $8.39, respectively.
As of October 1, 2023, its total current assets stood at 22.78 billion, compared to $21.06 billion as of December 31, 2022.
Analysts expect GD’s revenue to come in at $46.09 billion for the year ending December 2024, increased 9.6% year-over-year. Its EPS is expected to grow 23.8% year-over-year to $15 for the same period. The stock has gained 11% over the past nine months to close the last trading session at $249.76.
It’s no surprise that GD has an overall B rating, equating to a Buy in our POWR Ratings system. It has a B grade for Stability and Momentum. It is ranked #10 in the same industry.
Beyond what is stated above, we’ve also rated GD for Growth, Value, Sentiment and Quality. Get all GD ratings here.
Stock #1: Elbit Systems Ltd. (ESLT)
Headquartered in Haifa, Israel, ESLT develops and supplies a portfolio of airborne, land, and naval systems and products for defense, homeland security, and commercial aviation applications, primarily in Israel. The company operates through Aerospace; C4I and Cyber; ISTAR and EW; Land; and Elbit Systems of America segments.
ESLT’s trailing-12-month CAPEX / Sales of 2.98% is marginally higher than the 2.97% industry average.
ESLT’s revenues increased 11.3% year-over-year to $1.50 billion in the fiscal third quarter that ended September 30, 2023. Its non-GAAP gross profit stood at $373.80 million, up 10.6% year-over-year. The company’s operating income grew 38.8% from the year-ago quarter to $117 million.
Also, its non-GAAP net income attributable to ESLT’s shareholders and non-GAAP net EPS grew 17.4% and 17.9% year-over-year to $73.50 million and $1.65, respectively.
The consensus revenue estimate of $6.46 billion for the year ending December 2024 reflects a 8.1% rise year-over-year. Its EPS is expected to grow 5.8% year-over-year to $5.67 for the same period. The stock has gained 22.3% over the past year to close the last trading session at $208.48.
ESLT has an overall B rating, equating to a Buy in our POWR Ratings system.
ESLT’s is ranked #9 in the same industry. It has an A grade for Stability and a B for Momentum. To see additional ESLT’s ratings for Growth, Value, Sentiment and Quality, click here.
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GD shares were trading at $249.72 per share on Tuesday morning, down $0.04 (-0.02%). Year-to-date, GD has declined -3.32%, versus a 1.67% 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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