The defense sector shows promise this year due to increased global conflicts, ongoing military modernization, higher sales, and rapid technological advancements. Given the industry’s growth prospects, it could be wise to buy fundamentally strong defense stocks: Innovative Solutions and Support, Inc. (ISSC), Lockheed Martin Corporation (LMT), and Willis Lease Finance Corporation (WLFC).
Rising defense spending by both developed and emerging nations presents significant growth opportunities for defense firms, emphasizing military readiness. Geopolitical tensions and evolving warfare, such as the conflicts in Ukraine and between Israel and Hamas, further boost the industry's prospects. The aerospace and defense market is projected to grow at a 5.9% CAGR, reaching $1.08 trillion by 2027.
The U.S. Defense Department's fiscal year 2025 budget request of $849.8 billion includes substantial investments in air defense, with $61.2 billion allocated to reinforce U.S. air dominance. This allocation highlights the focus on modernizing and enhancing air defense capabilities, ensuring the U.S. maintains superior air power.
Meanwhile, the U.S. has approved $175 billion in aid for Ukraine, with $117.4 billion for defense-related priorities. This investment boosts demand in the defense market by funding military equipment, training, and support. This increased spending drives industry growth and highlights the need for advanced military technology.
Consequently, technological advancements in radar, AI, and analytics are enhancing modern warfare, driving growth in the air defense systems market. With increased defense spending and ongoing threats, the air defense systems market is projected to grow at a 4.7% CAGR, reaching $58.51 billion by 2029.
Therefore, let’s analyze the fundamentals of the three Air/Defense Services picks, beginning with the third choice.
Stock #3: Innovative Solutions and Support, Inc. (ISSC)
ISSC is a systems integrator that designs, develops, manufactures, sells, and services flight guidance, autothrottles, and cockpit display systems internationally. The company serves diverse clients, including commercial air transport carriers, government agencies, and original equipment manufacturers.
ISSC’s 16.75% trailing-12-month Return on Common Equity is 34.7% higher than the 12.43% industry average. Its 15.42% trailing-12-month net income margin is 156.6% higher than the 6.01% industry average. Furthermore, the stock’s 21.48% trailing-12-month EBIT margin is 110.6% higher than the industry average of 10.20%.
For the second quarter ended March 31, 2024, ISSC’s total net sales increased 46.3% year-over-year to $10.74 million. The company’s gross profit rose 17.8% year-over-year to $5.58 million. Additionally, its net income and net income per share came in at $1.21 million and $0.07, respectively.
Street expects ISSC’s revenue for fiscal 2024 to increase 28.4% year-over-year to $44.70 million. Over the past month, the stock has declined 3.6% to close the last trading session at $6.39.
ISSC’s bright prospects are reflected in its POWR Ratings. 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 #3 out of 72 stocks in the Air/Defense Services industry. It has an A grade for Sentiment and a B for Value, Momentum, and Quality. In addition to the POWR Ratings grades I’ve just highlighted, you can see ISSC’s ratings for Growth, and Stability, here.
Stock #2: 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 May 20, 2024, LMT announced that their PAC-3 MSE interceptor successfully integrated with the Aegis Weapon System to defeat a cruise missile target in a flight test. This marks the first use of PAC-3 MSE with the Virtualized Aegis Weapon System.
The successful integration demonstrates the capability of the PAC-3 MSE interceptor to work effectively with the advanced Aegis Weapon System. This milestone represents a significant advancement in missile defense technology.
On May 17, 2024, LMT announced a $756 million contract from the U.S. Army to provide additional Long Range Hypersonic Weapon (LRHW) batteries, systems, and support. The LRHW system is designed to deliver highly precise and rapid strikes against time-sensitive targets. This contract further solidifies Lockheed Martin's position as a leader in advanced weapon systems technology.
In terms of the trailing-12-month net income margin, LMT’s 9.73% is 61.9% higher than the 6.01% industry average. Likewise, its 21.83% trailing-12-month Return on Total Capital is 209.4% higher than the industry average of 7.06%. Also, the stock’s 1.27x trailing-12-month asset turnover ratio is 62.1% higher than the industry average of 0.78x.
LMT’s net sales for the fiscal first quarter that ended March 31, 2024, grew 13.7% year-over-year to $17.20 billion. Also, its aeronautics net sales increased 9.2% year-over-year to $6.85 billion. Likewise, the company’s non-GAAP net earnings stood at $1.53 billion, while its non-GAAP EPS came in at $6.33. Moreover, its cash from operations rose 4.5% year-over-year to $1.63 billion.
Analysts expect LMT’s revenue for the quarter ended June 30, 2024, to increase 1.8% year-over-year to $16.99 billion. Its EPS for the fiscal 2025 is expected to grow 6% year-over-year to $27.77. It surpassed the consensus EPS and revenue estimates in three of the trailing four quarters. Over the past three months, the stock has gained 8.4% to close the last trading session at $467.35.
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 Value, Momentum, Stability, Sentiment, and Quality. It is ranked #2 in the same industry. To see LMT’s Growth rating, 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.
In terms of the trailing-12-month Capex/Sales, WLFC’s 21.07% is 619.8% higher than the 2.93% industry average. Similarly, its 37.02% trailing-12-month EBIT margin is 262.9% higher than the 10.20% industry average. In addition, its 57.71% trailing-12-month EBITDA margin is 318.5% higher than the 13.79% industry average.
WLFC’s total revenue for the fiscal first quarter ended March 31, 2024, increased 33% year-over-year to $119.08 billion. The company’s income from operations increased 240.3% year-over-year to $27.22 million. In addition, its net income attributable to common shareholders and income per common share rose 458.7% and 445.5% over the prior-year quarter to $19.96 million and $3, respectively.
Over the past year, WLFC’s stock has gained 60.9% to close the last trading session at $65.46.
WLFC’s favorable outlook is reflected in its POWR Ratings. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and a B for Value, Sentiment, and Quality. It is ranked first in the Air/Defense Services industry. Beyond what we stated above, we have also rated WLFC for Momentum, and Stability. Get all ratings of WLFC here.
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LMT shares were trading at $467.35 per share on Monday morning, up $0.27 (+0.06%). Year-to-date, LMT has gained 3.87%, versus a 11.73% 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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