The increasing geopolitical tensions across the globe have emphasized the necessity of sustaining a strong defense. Instances such as the recent missile strike orchestrated by rebels supported by Iran, the ongoing conflict between Israel and Palestinians, and the war between Russia and Ukraine serve as notable examples of the heightened tensions compelling nations to boost their spending on defense.
Given the industry’s long-term growth prospects, it could be wise to buy fundamentally strong defense stocks Northrop Grumman Corporation (NOC) and MSA Safety Incorporated (MSA). However, not all defense stocks are likely to benefit from the industry tailwinds. Rocket Lab USA, Inc.’s (RKLB) poor fundamentals and growth prospects make it best avoided now.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the defense industry’s prospects.
Increasing defense spending in developed and emerging nations is presenting opportunities for defense companies as nations prioritize military readiness. The anticipated growth is being further fueled by factors like growing geopolitical instabilities and the evolving nature of warfare.
The changing nature of air warfare with advanced threats emphasizes the need for more robust air defense. Given the increased threats and defense spending, the air defense systems market is projected to grow at a CAGR of 7.4% to reach $21.41 billion by 2027.
The U.S. Congress recently approved the National Defense Authorization Act (NDAA), which authorizes a record of annual military spending and policies of $886 billion, such as aid for Ukraine and to strengthen deterrence and defense in the Indo-Pacific region, countering China's growing influence.
Moreover, the Air Force's budget request for fiscal 2024 is $215.10 billion, marking a 4.5% increase from 2023. Furthermore, the aerospace and defense market is anticipated to grow at a 5.9% CAGR to reach $1.08 trillion by 2027.
Furthermore, technological advances are helping transform modern warfare by improving missile and air defense systems by integrating radar, AI, and analytics. The use of AI and robotics in the aerospace and defense market is projected to grow from $31.90 billion in 2024 to $45.80 billion in 2029, registering a CAGR of 7.5%.
In light of this context, let’s analyze the fundamentals of the three Air/Defense Services stocks, starting with the least favorable one from an investment perspective.
Stock #3: Rocket Lab USA, Inc. (RKLB)
RKLB is a space company that offers launch services and space systems solutions for the space and defense industries. The company provides launch services, spacecraft design services, spacecraft components, spacecraft manufacturing, and other spacecraft and on-orbit management solutions.
In terms of the trailing-12-month gross profit margin, RKLB’s 15.97% is 47.4% lower than the 30.38% industry average. Furthermore, its 0.24x trailing-12-month asset turnover ratio is 70.2% lower than the 0.81x industry average.
For the third quarter that ended September 30, 2023, RKLB’s revenues came in at $67.66 million. Its non-GAAP operating loss widened 64.4% over the prior-year quarter to $19.88 million. In addition, its non-GAAP net income and non-GAAP EPS widened 17.2% and 14.3% year-over-year to $40.57 million and $0.08, respectively.
Street expects RKLB’s EPS for the quarter ended December 31, 2023, to remain negative. Over the past six months, the stock has declined 32.3% to close the last trading session at $5.08.
RKLB’s weak prospects are reflected in its POWR Ratings. It has an overall rating of F, which translates to a Strong Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #71 out of 72 stocks in the Air/Defense Services industry. It has an F grade for Quality and a D for Growth, Value, and Stability. In addition to the POWR Ratings grades I’ve just highlighted, you can see RKLB’s ratings for Momentum and Sentiment here.
Stock #2: MSA Safety Incorporated (MSA)
MSA develops, manufactures, and supplies safety products and software that protect people and facility infrastructures in the oil, gas, petrochemical, fire service, construction, industrial manufacturing applications, heating, ventilation, air conditioning and refrigeration, utilities, military, and mining industries internationally.
On December 6, 2023, MSA announced a $35 million contract with the U.S. Air Force to supply air base fire brigades with its G1 Self-Contained Breathing Apparatus (SCBA) and related equipment.
The contract involves replacing older model MSA air masks and providing advanced features for firefighter health and safety, with production underway at MSA's facility in Murrysville, Pennsylvania, and deliveries expected through 2024.
In terms of the trailing-12-month EBIT margin, MSA’s 22.76% is 132.1% higher than the 9.81% industry average. Likewise, its 26.19% trailing-12-month EBITDA margin is 91.4% higher than the 13.68% industry average. Furthermore, its 15.76% trailing-12-month Return on Total Capital is 123.2% higher than the 7.06% industry average.
MSA for the fiscal third quarter that ended September 30, 2023, generated net sales of $702 million. Its adjusted EBITDA came in at $107 million. The company’s adjusted net income attributable to MSA stood at $45.47 million. Also, its adjusted EPS came in at $2.04.
Analysts expect MSA’s EPS and revenue for the quarter ending December 31, 2023, to increase 4.1% and 5.5% year-over-year to $1.87 and $467.52 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 28.1% to close the last trading session at $167.74.
MSA’s POWR Ratings reflect strong prospects. It has an overall rating of B, translating to a Buy in our proprietary rating system.
It has an A grade for Sentiment and a B for Momentum and Quality. It is ranked #18 in the same industry. To see MSA’s Growth, Value, and Stability ratings, click here.
Stock #1: Northrop Grumman Corporation (NOC)
NOC operates as an aerospace and defense company worldwide. It operates through the Aeronautics Systems, Defense Systems, Mission Systems, and Space Systems segments.
On August 8, 2023, the NOC announced the manufacturing of the first set of solid rocket motor cases for the Missile Defense Agency’s (MDA) Next-Generation Interceptor (NGI) program. This milestone demonstrates advancements in design and manufacturing, utilizing pathfinder motors for testing and integration operations.
NOC’s NGI Vice President Lisa Brown said, “Our experienced teams and cutting-edge solid rocket motor manufacturing technologies, backed by flight-proven processes, have enabled us to achieve several key milestones in rapid succession. With NGI’s mission to defend our homeland against incoming enemy threats, saving time and reducing risk is vital.”
In terms of the trailing-12-month EBIT margin, NOC’s 15.10% is 54% higher than the 9.81% industry average. Likewise, its 8.23% trailing-12-month levered FCF margin is 41.3% higher than the 5.82% industry average. Furthermore, its 0.88x trailing-12-month asset turnover ratio is 8.5% higher than the 0.81x industry average.
NOC’s total sales for the third quarter ended September 30, 2023, increased 9% year-over-year to $9.78 billion. Its operating income rose 20.4% year-over-year to $1.02 billion. The company’s net earnings increased 2.4% year-over-year to $937 million. Additionally, its EPS came in at $6.18, representing an increase of 4.9% year-over-year.
For the quarter ended December 31, 2023, NOC’s revenue is expected to increase 4% year-over-year to $10.44 billion. Its EPS for the quarter ending March 31, 2024, is expected to increase 5.1% year-over-year to $5.78. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 3.8% to close the last trading session at $467.92.
NOC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, translating to a Buy in our proprietary rating system.
It has a B grade for Momentum and Stability. It is ranked #17 in the Air/Defense Services industry. In total, we rate NOC on eight different levels. Beyond what we stated above, we have also given NOC grades for Growth, Value, Sentiment, and Quality. Get all the NOC’s ratings here.
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.
NOC shares were trading at $467.00 per share on Wednesday afternoon, down $0.92 (-0.20%). Year-to-date, NOC has declined -0.24%, versus a 2.62% 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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