Amid escalating geopolitical unrest worldwide, the defense sector is anticipated to remain buoyed amid substantial investments in advanced technologies in this field. Given this backdrop, let’s analyze defense stocks FTAI Aviation (FTAI), TransDigm Group (TDG), and Astronics Corporation (ATRO) to determine the best investment opportunity in this space. Read on….
The ever-changing geopolitical landscape highlights the importance of constant advancement in the defense technology field. Firms within this sector are strategically placing themselves at the forefront of technological evolution.
Given the industry’s promising outlook, in this piece, we evaluate three air defense stocks to illustrate their potential in helping investors capitalize on the prevailing industry tailwinds.
Solid buy candidates for 2024 appear to be TransDigm Group Incorporated (TDG) and Astronics Corporation (ATRO), given their robust fundamentals. Conversely, I think FTAI Aviation Ltd. (FTAI) should be best avoided, given its weak fundamentals.
Let’s first look at what’s shaping the air defense industry before delving deeper into the fundamentals of the three stocks.
Over the past few years, a continual uptick in global military expenditure has been observed. This rise can be attributed to the mounting geopolitical turmoil, including the Israel-Hamas hostilities, Russia’s incursion into Ukraine, tensions in the South China Sea, and Iran-Pakistan airstrikes. The investment by nations in reinforcing their military prowess has, in turn, resulted in an escalating demand for military aircraft to bolster their defensive arsenals.
In 2023, defense expenditure in the U.S. reached $746 billion and is projected to soar to $1.10 trillion by 2033.
Defense corporations primarily rely on a single customer – the U.S. government – for the lion’s share of their revenue. Fortunately, the federal government’s financial stability and reliability allow defense companies and investors to manage cash flows and forecast growth with a degree of certainty.
The U.S. Congress has given its stamp of approval to a substantial defense budget of $886 billion for the fiscal year 2024. Moreover, the requested budget for the U.S. Air Force stands at approximately $259.24 billion, which includes funds allocated for the Space Force.
2024 promises to be a pivotal year for the future potency of the U.S. Air Force. This is considering its drive toward modernization that encompasses the deployment of several revolutionary technologies. Bolstered by technologically superior weaponry and aircraft as well as the increasing integration of state-of-the-art technologies, it is predicted that the global air defense systems market could reach $71.73 billion by 2032, growing at a of 5.1%.
In light of these trends, let’s look at the fundamentals of the three Air/Defense Services stocks, beginning with the weakest from the investment point of view.
Stock #3: FTAI Aviation Ltd. (FTAI)
FTAI owns and acquires infrastructure and related equipment for the transportation of goods and people worldwide. It operates through the Aviation Leasing and Aerospace Products segments.
FTAI’s trailing-12-month asset turnover ratio of 0.46x is 43.1% lower than the industry average of 0.81x, while its trailing-12-month cash from operations of $117.41 million is 59.7% lower than the industry average of $291.24 million.
For the fiscal third quarter that ended September 30, 2023, FTAI’s total revenues and net income attributable to shareholders stood at $291.10 million and $32.97 million, respectively. Moreover, its total expenses increased 17.9% year-over-year to $246.59 million.
For the same quarter, its earnings per share from continuing operations came at $0.33, while adjusted EBITDA came at $154.22 million. For the nine months that ended September 30, 2023, its cash and cash equivalents and restricted cash, end of period declined 27.3% from the year-ago period to $52.88 million.
Street expects FTAI’s revenue and EPS in the fiscal first quarter ending March 2024 to be $291.25 million and $0.41, respectively. The company failed to surpass consensus EPS estimates in three of the trailing four quarters.
The stock has gained 1.3% intraday to close the last trading session at $50.16.
FTAI’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a D grade for Value and Sentiment. Within the Air/Defense Services industry, it is ranked #57 out of 73 stocks.
To see additional POWR Ratings for Growth, Momentum, Stability, and Quality for FTAI, click here.
Stock #2: TransDigm Group Incorporated (TDG)
TDG designs, produces, and supplies aircraft components in the United States and internationally. The company operates through Power & Control; Airframe; and Non-aviation segments.
On November 27, 2023, TDG paid a special cash dividend of $35 on each outstanding share of common stock and cash dividend equivalent payments under options granted under its stock options plans.
This will leave the company with significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities. Moreover, TDG is continuously evaluating its capital allocation options and is pleased to return this amount of capital to its shareholders.
On November 9, 2023, TDG acquired the Electron Device Business of Communications & Power Industries, a portfolio company of TJC, L.P., for approximately $1.39 billion in cash.
This acquisition fits well with TDG’s long-standing strategy. TDG expects this acquisition to create equity value in line with its long-term private equity-like return objectives.
TDG’s trailing-12-month cash per share of $62.78 is significantly higher than the industry average of $2.13. Its trailing-12-month EBIT and EBITDA margins of 44.71% and 48.78% are 353.9% and 257.7% higher than the industry averages of 9.85% and 13.64%, respectively.
For the fiscal fourth quarter that ended September 30, 2023, TDG’s net sales and gross profit increased 22.6% and 23.3% year-over-year to $1.85 billion and $1.09 billion, respectively.
For the same quarter, its adjusted net income and adjusted earnings per share stood at $460 million and $8.03, up 47% and 46% from the prior-year quarter, respectively. Moreover, its EBITDA as defined increased 28.1% from the year-ago quarter to $963 million.
Street expects TDG’s revenue and EPS for the fiscal second quarter ending March 2024 to increase 17.1% and 29.1% year-over-year to $1.86 billion and $7.72, respectively. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 66% over the past year to close the last trading session at $1,057.13. Over the past nine months, it has gained 44.1%.
TDG’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
TDG has a B grade for Growth, Momentum, and Quality. Within the same industry, it is ranked #24.
Beyond what we’ve stated above, we have also rated the stock for Value, Stability, and Sentiment. Get all ratings of TDG here.
Stock #1: Astronics Corporation (ATRO)
ATRO designs and manufactures products for the aerospace, defense, and electronics industries. The company operates in two segments: Aerospace and Test Systems.
ATRO’s trailing-12-month asset turnover ratio of 1.06x is 30.9% higher than the industry average of 0.81x.
For the fiscal third quarter that ended September 30, 2023, ATRO’s sales and gross profit increased 24% and 43.3% year-over-year to $162.92 million and $20.62 million, respectively. Moreover, its adjusted EBITDA increased significantly from the prior-year quarter to $8.83 million.
For the nine months that ended September 30, 2023, its cash and cash equivalents and restricted cash at end of period stood at $7.65 million, up 197.9% from the year-ago period.
Street expects ATRO’s revenue for the fiscal first quarter ending March 2024 to increase 15.3% year-over-year to $180.48 million. Its EPS is expected to be $0.11 for the same quarter. The company surpassed consensus revenue estimates in three of the trailing four quarters.
The stock has gained 63.2% over the past year to close the last trading session at $16.87. Over the past three months, it has gained 9.8%.
ATRO’s robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to Buy in our proprietary rating system.
ATRO has a B grade for Momentum. It is ranked #21 within the same industry.
Click here for the additional POWR Ratings for ATRO (Growth, Value, Stability, Sentiment, and Quality).
What To Do Next?
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TDG shares were unchanged in premarket trading Monday. Year-to-date, TDG has gained 4.50%, versus a 1.50% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi’s interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy.
Having earned a master’s degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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