The defense industry’s growth prospects appear promising as a result of growing geopolitical tensions around the world, technological improvements, and higher defense spending.

Therefore, investors could consider buying fundamentally strong defense stocks Kaman Corporation (KAMN), OSI Systems, Inc. (OSIS), and MSA Safety Incorporated (MSA) for long-term growth.

Before diving deeper into their fundamentals, let’s discuss what’s happening in the defense industry.

According to an annual assessment by the military think tank, the International Institute of Strategic Studies, global defense spending increased by 9% to a record $2.2 trillion in 2023, spurred by the growing geopolitical tensions created by Russia’s invasion of Ukraine.

In addition, the think tank has stated that it anticipates defense budgets to rise even more in 2024 as the conflict enters its third year and there exists fears of unrest spreading throughout the Middle East following the Israel – Hamas war.

Furthermore, the U.S. Congress approved a record $886.3 billion in annual military spending. The National Defense Authorization Act (NDAA) includes measures to help Ukraine, a five-percent hike to military personnel, and a disputed domestic surveillance authority.

In addition, President Biden revealed a budget proposal that seeks to spend $895 billion on military and national security, which is less than previous years’ increases but still the highest amount to date.

The request includes $45 billion for homeland security and nuclear weapons-related activities carried out by the Department of Energy. It is the result of a two-year budget agreement reached in mid-2023 that limited the budget increase to 1%.

Furthermore, the aerospace and defense industry is witnessing enhanced prospects as aerial warfare is continuously evolving due to the use of drones, advanced combat aircraft, and surface-to-air missiles. The aerospace and defense market is expected to reach $1.23 trillion in 2028, growing at a CAGR of 5.8%.

The aerospace and defense industry is steadily investing in artificial intelligence and robotics. AI is being used in maintenance, health monitoring, airport operations, and pilot training, making it an essential aspect of aerospace. The artificial intelligence and robotics market in aerospace and defense is estimated to reach $34.60 billion by 2029, growing at a 7.8% CAGR.

Moreover, investors’ interest in defense stocks is evident from the SPDR S&P Aerospace & Defense ETF’s (XAR) 21.6% returns over the past year.

With these encouraging trends in mind, let’s delve into the fundamentals of the three best Air/Defence Services stock picks, beginning with the third choice.

Stock #3: Kaman Corporation (KAMN)

KAMN operates in the aerospace, defense, medical, and industrial markets. It operates through three segments: Engineered Products, Precision Products, and Structures. The company produces and markets aircraft bearings and components, super precision, miniature ball bearings, and spring-energized seals.

KAMN’s total assets have grown at a CAGR of 4.7% over the past three years.

KAMN’s trailing-12-month gross profit margin of 34.96% is 14.8% higher than the 30.44% industry average. Also, its 3.35% trailing-12-month CAPEX / Sales is 11.7% higher than the 3% industry average.

During the fourth quarter that ended December 31, 2023, KAMN’s net sales increased 3% year-over-year to $203.12 million. Its adjusted net earnings for the quarter were $3.45 million. The company’s adjusted EPS came in at $0.12. Also, the company’s adjusted EBITDA stood at $25.62 million.

Street expects KAMN’s EPS and revenue for the quarter ending June 30, 2024, to increase 9.1% and 2.2% year-over-year to $0.24 and $199.35 million, respectively. Over the past six months, the stock has gained 126.7% to close the last trading session at $45.91.

KAMN’s POWR Ratings reflect this promising outlook. It 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.

KAMN has a B grade for Growth, Value, and Momentum. Within the Air/Defense Services industry, it is ranked #20 out of 73 stocks. To see the additional ratings of KAMN for Stability, Sentiment, and Quality, click here.

Stock #2: OSI Systems, Inc. (OSIS)

OSIS designs and manufactures electronic systems and components. The company operates in three segments: Security, Healthcare, and Optoelectronics and Manufacturing. It offers baggage and parcel inspection, cargo and vehicle inspection, hold baggage and people screening, radiation monitoring, and explosive and narcotics trace detection systems.

On March 11, 2024, OSIS reported that its Optoelectronics and Manufacturing division had obtained a $3 million order to deliver advanced optical sensors to a major defense electronics original equipment manufacturer (OEM). These high-precision components are intended for integration into sophisticated missile systems.

OSI Systems’ Chairman and Chief Executive Officer, Deepak Chopra, stated, “This collaboration underscores our commitment to excellence and innovation in defense technologies. We are honored to contribute to the enhancement of global security measures with our optical sensor products.”

On March 7, 2024, OSIS was awarded a $16 million contract by an international airport to enhance its checkpoint security infrastructure. To improve security operations, modern 920CT screening technologies will be connected with automated tray return systems (TRS) lanes.

OSI Systems’ Chairman and CEO, Deepak Chopra, stated, “This award signifies another milestone in our ongoing commitment to delivering advanced security solutions to this customer. Adding our TRS lanes is expected to enhance throughput further, providing a smoother and more efficient passenger screening process.”

OSIS’ revenue has grown at a CAGR of 7.5% over the past three years. Also, the company’s net income grew at a CAGR of 21.8% over the past three years.

OSIS’ trailing-12-month net income margin of 8.31% is 206% higher than the 2.72% industry average. Its trailing-12-month EBIT margin of 11.49% is 137.9% higher than the 4.83% industry average. Additionally, its 16.02% trailing-12-month Return on Common Equity is 407.7% higher than the 3.16% industry average.

For the fiscal 2024 second quarter that ended December 31, 2023, OSIS’ total net revenue increased 26.3% year-over-year to $373.23 million. Its non-GAAP operating income increased 84.1% from the year-ago value to $58.03 million.

In addition, its non-GAAP net income and non-GAAP EPS came in at $38.25 million and $2.21, up 87.7% and 85.7% year-over-year, respectively. As of December 31, 2023, the company’s cash and cash equivalents were $127.26 million, compared to $76.75 million as of June 30, 2023.

For the quarter ending March 31, 2024, OSIS’s revenue and EPS are expected to increase 32.7% and 41.3% year-over-year to $401.99 million and $2.11, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 41.6% to close the last trading session at $129.70.

OSIS’ strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.

It is ranked #19 in the same industry. It has an A grade for Sentiment and a B for Growth. Click here to see the additional ratings of OSIS for Value, Momentum, Stability, and Quality.

Stock #1: 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.

MSA’s revenue has grown at a CAGR of 9.9% over the past three years. Also, the company’s levered free cash flow grew at a CAGR of 40.8% over the past three years.

MSA’s trailing-12-month gross profit margin 47.67% is 56.6% higher than the industry average of 30.44%. Likewise, the stock’s trailing-12-month levered FCF margin of 16.57% is 154.3% higher than the industry average of 6.52%. Additionally, its 22.52% trailing-12-month EBIT margin is 126.1% higher than the industry average of 9.96%.

MSA’s net sales grew 11.7% year-over-year to $495 million for the fourth quarter that ended December 31, 2023. Its adjusted operating income increased 19.8% from the year-ago value to $115 million. Also, the company’s adjusted earnings and adjusted EPS were $82 million and $2.06, up 15.5% and 14.4% from the previous year’s quarter, respectively.

Analysts expect MSA’s EPS and revenue for the quarter ending March 31, 2024, to increase 15% and 7.6% year-over-year to $1.56 and $428.38 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. MSA shares have gained 42.2% over the past year, closing the last trading session at $186.81.

It’s no surprise that MSA has an overall B rating, equating to a Buy in our POWR Ratings system.

It has an A grade for Sentiment and a B for Growth, Momentum, and Quality. It is ranked #17 in the Air/Defense Services industry.

Beyond what is stated above, we’ve also rated MSA for Value and Stability. Get all MSA 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.

2024 Stock Market Outlook >

MSA shares were trading at $186.46 per share on Thursday morning, down $0.35 (-0.19%). Year-to-date, MSA has gained 10.74%, versus a 8.38% 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. More...

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