The air defense industry is benefitting from rising geopolitical tensions, such as conflicts involving Israel-Hamas and Russia-Ukraine. As a result, the US Congress approved a $886 billion defense budget for 2024, which signals significant opportunities for the US defense industry.
Given the industry’s steady growth prospects, investors could consider quality defense stocks with bullish momentum, Embraer S.A. (ERJ), CPI Aerostructures, Inc. (CVU), and BAE Systems plc (BAESY).
The air defense system market is anticipated to grow at a CAGR of over 7% until 2032 owing to the expanding industrial & manufacturing sectors. The rising global air traffic and the expanding commercial aviation sector have led to an increased need to safeguard airspace from potential threats. These factors have contributed to the demand for advanced air defense systems.
Furthermore, technological breakthroughs are increasing the efficacy of missile and air defense systems. The integration of radar systems, artificial intelligence, and analytics has expedited threat identification and interception, fundamentally reshaped modern warfare's landscape, and propelled the sector’s growth trajectory.
The aerospace and defense market is expected to grow at a CAGR of 5.9% to reach $1.08 trillion by 2027.
With these favorable trends in mind, let's delve into the fundamentals of the three best Air/Defense Services stocks, beginning with the third choice.
Stock #3: Embraer S.A. (ERJ)
Headquartered in São Paulo, Brazil, ERJ designs, develops, manufactures, and sells aircraft and systems in North America, Latin America, the Asia Pacific, Brazil, Europe, and internationally. The company operates through Commercial Aviation; Defense & Security; Executive Aviation; Services & Support; and other segments.
On December 20, 2023, ERJ announced that it was doubling its maintenance service capacity in the United States, to support the continued growth of its executive jets' customer base through the addition of three Executive Aviation Maintenance, Repair and Overhaul (MRO) facilities in Dallas Love Field, TX, Cleveland, OH, and Sanford, FL.
ERJ’s trailing-12-month CAPEX/Sales of 3.78% is 27.9% higher than the industry average of 2.96%.
ERJ’s revenue for the fiscal third quarter (ended September 30, 2023) increased 4.2% year-over-year to $1.28 billion and its gross profit grew 12.9% from the year-ago quarter to $233.10 million. Furthermore, its profit for the period came in at $64.30 million, compared to a loss of $41.40 million in the previous-year quarter. Also, its earnings per share came in at $0.0830, compared to negative $0.0411 in the previous-year quarter.
Street expects ERJ’s revenue for the fiscal fourth quarter ended December 2023 to grow 3% year-over-year to $2.05 billion. Its EPS is expected to increase 448.2% year-over-year to $0.68 for the same quarter. Also, it has surpassed its revenue estimates in three of the trailing four quarters, which is impressive.
ERJ’s shares have gained 29.4% over the past three months to close the last trading session at $18.36.
ERJ’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an A grade for Growth and a B in Value, Momentum, and Sentiment. It is ranked #15 out of 72 stocks in the Air/Defense Services industry.
Beyond what is stated above, we’ve also rated ERJ for Stability and Quality. Get all ERJ ratings here.
Stock #2: CPI Aerostructures, Inc. (CVU)
CVU engages in the contract production of structural aircraft parts for fixed-wing aircraft and helicopters in the commercial and defense markets.
On November 21, 2023, CVU announced that Embraer S.A. of Brazil (ERJ) had placed several additional orders against a previously announced Long Term Agreement to manufacture engine inlet assemblies for the Embraer Phenom 300 business jets. These new orders will see deliveries continue into 2024.
CVU’s trailing-12-month net income margin of 10.66% is 73.5% higher than the industry average of 6.14%. Its trailing-12-month asset turnover ratio of 1.53x is 89.1% higher than the industry average of 0.81x.
CVU’s revenue for the fiscal third quarter that ended September 30, 2023, increased marginally year-over-year to $20.40 million. The company’s gross profit came in at $3.71 million. Its net income stood at $301.36 million while income per common share came in at $0.02.
Over the past month, the stock has gained 2.3% to close the last trading session at $2.65.
CVU’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
The stock has an A grade for Value and a B in Momentum and Sentiment. It is ranked #12 in the same industry.
Click here to access the additional CVU ratings (Quality, Growth, and Sentiment).
Stock #1: BAE Systems plc (BAESY)
Based on UK, BAESY provides defense, aerospace, and security solutions worldwide. The company operates through five segments: Electronic Systems; Cyber & Intelligence; Platforms & Services (US); Air; and Maritime.
BAESY’s trailing-12-month EBIT margin of 10.27% is 4.7% higher than the industry average of 9.81%. Its trailing-12-month gross profit margin of 63.12% is 107.8% higher than the industry average of 30.38%.
BAESY’s sales for six months that ended June 30, 2023, increased 13.6% year-over-year to £12.02 billion ($15.29 billion). Its underlying EBIT rose 13.1% year-over-year to £1.26 billion ($1.60 billion). Its operating profit increased 19.9% year-over-year to £1.23 billion ($1.56 billion). The company’s profit for the period increased 55.3% year-over-year to £1.01 billion ($1.29 billion).
Analysts expect BAESY’s revenue for the year ending December 2023, to increase 12.2% year-over-year to $31.38 billion.
Over the past six months, the stock has gained 25.5% to close the last trading session at $60.09.
It’s no surprise that BAESY has an overall rating of B, which equates to a Buy in our proprietary rating system.
BAESY has an A grade for Stability and a B for Value and Momentum. It is ranked #13 in the same industry.
In addition to the POWR Ratings highlighted above, one can access BAESY’s ratings for Growth, Quality, and Sentiment, here.
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ERJ shares were trading at $18.18 per share on Thursday afternoon, down $0.18 (-0.98%). Year-to-date, ERJ has declined -1.46%, versus a 2.42% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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