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3 Defense Stocks Backed by Smart Money

Amid the mounting global geopolitical unrest, the defense sector is poised to grow, buoyed by significant investments in cutting-edge technologies. Therefore, quality defense stocks Elbit Systems (ESLT), OSI Systems (OSIS), and Willis Lease Finance (WLFC), backed by smart money, could be solid buys now. Read on...

The dynamic landscape of geopolitics underscores the significance of persistent innovation in defense technologies. Companies engaged in this sector are intensifying their investments in research and development, strategically stationing themselves at the vanguard of technological progress.

Given the demand for advanced defense capabilities worldwide, investing in stocks favored by institutional investors may yield solid returns. Therefore, air defense stocks Elbit Systems Ltd. (ESLT), OSI Systems, Inc. (OSIS), and Willis Lease Finance Corporation (WLFC) could be valuable portfolio additions now.

Worldwide defense budgets have surged, driven partly by the Russia-Ukraine conflict that has spurred nations to reassess their military allocations. According to the Stockholm International Peace Research Institute’s (SIPRI) global military spending data, global military expenditure achieved an unprecedented high, touching $2.24 trillion in 2022.

The United States, still contending with mounting inflation, took the lead as the principal contributor, accounting for 39% of total global military expenses. The nation's military outlay for 2022 amounted to $877 billion, thrice that of China. It allocated $295 billion to military operations and maintenance, $264 billion to procurement and research and development, and $167 billion to military personnel.

Prevailing geopolitical turmoil compelled nations worldwide to prioritize territorial defense against potential threats, which led to an intensified focus on enhancing air defense capabilities. Many countries are investing significantly in their military capabilities, prompting an upsurge in demand for military aircraft to bolster their defense systems.

The Department of the Air Force's fiscal year 2024 budget request displayed a 4.5% year-over-year increase to $215.1 billion. The Air Force's request for Research, Development, Test, and Evaluation (RDT&E) stands at $36.2 billion, an increase of $2.3 billion from the previous fiscal year. This increase illustrates the commitment to nuclear modernization and strategic attack deterrence favoring the U.S. and its international allies and partners.

Propelled by technologically advanced weapons and aircraft and the growing integration of cutting-edge technologies, the global air defense systems market is anticipated to reach $78.2 billion by 2031, growing at a CAGR of 5.6%.

Therefore, ESLT, OSIS, and WLFC, which smart money likes, could be wise portfolio additions now.

Elbit Systems Ltd. (ESLT)

Headquartered in Haifa, Israel, ESLT develops and supplies a portfolio of airborne, land, and naval systems and products for defense, homeland security, and commercial aviation applications, primarily in Israel. The company operates through Aerospace, C4I and Cyber, ISTAR and EW, Land, and Elbit Systems of America segments.

Institutions hold roughly 19.1% of ESLT shares. Of the 167 institutional holders, 73 have increased their positions in the stock. Moreover, 20 institutions have taken new positions in the stock with 89,378 shares.

On July 31, ESLT announced that it was awarded a contract worth approximately $60 million to supply thousands of 155mm artillery shells to the Israel Defense Forces' Artillery Corps. The contract will be performed over a period of one year. The company’s production infrastructure expansion and upgrade enable rapid production of high-quality solutions for the Israel Ministry of Defense.

In the same month, ESLT received a $150 million contract to supply PULS (Precise and Universal Launching Systems) rocket launchers and a package of precision-guided long-range rockets to an international customer. The contract will be performed over a period of three years. This should enhance the company’s operational efficiency.

Also, on July 10, ESLT paid the shareholders a dividend of $0.50 per share. It pays a $2 per share dividend annually, translating to a 0.96% yield on the current share price. Its four-year average dividend yield is 1.13%. The company’s dividend payouts have grown at a CAGR of 6.2% over the past three years and 2.6% over the past five years.

ESLT’s trailing-12-month CAPEX/Sales of 3.55% is 20.6% higher than the industry average of 2.94%. Also, its trailing-12-month levered FCF margin of 4.09% is 13.6% higher than its five-year average of 3.60%.

Its revenue has grown at CAGRs of 6.8% and 10% over the past three and five years, respectively. Its EBITDA and total assets have grown at CAGRs of 4% and 14.1%, respectively, over the past five years.

ESLT’s revenues increased 3% year-over-year to $1.39 billion in the fiscal first quarter that ended March 31, 2023, while its gross profit stood at $361.52 million, up 10.6% year-over-year. The company’s operating income grew 60.2% from the year-ago quarter to $93.90 million.

Non-GAAP net income attributable to ESLT's shareholders and non-GAAP net EPS grew 39.2% and 39.3% year-over-year to $75.60 million and $1.70, respectively. As of March 31, 2023, its total current assets stood at $5.37 billion, compared to $5.03 billion as of December 31, 2022.

Analysts expect ESLT’s revenue and EPS to increase 5.1% and 24.6% year-over-year to $1.42 billion and $1.57, respectively, for the fiscal third quarter ending September 2023. For the fiscal year ending December 2023, its EPS is expected to come at $6.01, while revenue is expected to increase 3.5% year-over-year to $5.70 billion.

ESLT’s shares have gained 25.5% year-to-date to close its last trading session at $205.84. Over the past three months, the stock gained 6.4%.

ESLT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which indicates Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has an A grade for Stability and a B for Sentiment. It is ranked #7 within the 71-stock Air/Defense Services industry.

Beyond what we have highlighted above, one can see ESLT’s ratings for Growth, Value, Momentum, and Quality here.

OSI Systems, Inc. (OSIS)

OSIS designs, manufactures, and sells electronics systems and components. The company’s products have applications in the healthcare, defense, and aerospace industries. It operates through three segments: Security; Healthcare; Optoelectronics; and Manufacturing.

Roughly 88.8% of OSIS shares are held by institutions. Of the 218 institutions owning OSIS shares, 92 have recently increased their positions in the stock. Moreover, 33 institutions have taken new positions in the stock.

In June, OSIS’ Security division received an order from a European customer for approximately $12 million to provide service and support for RTT 110 (Real Time Tomography) explosive detection systems that screen airport passengers’ hold baggage.

Through its global services team, the company partners with airports to support efficient and adequate security measures for air passenger safety. The order, coupled with May’s $10 million and $9 million orders for international security requirements, should bode well for the company in the foreseeable future.

OSIS’ trailing-12-month EBIT and net income margins of 10.87% and 6.91% are 142.7% and 243.6%, higher than the industry averages of 4.48% and 2.01%, respectively. Also, its trailing-12-month ROCE of 12.94% is significantly higher than the 0.62% industry average.

Its revenue has grown at a 2.68% CAGR over the past five years, while its total assets and tangible book value have grown at CAGRs of 4.9% and 16.4%, respectively, over the past three years.

OSIS’ total net revenues increased 4.3% year-over-year to $302.89 million in the fiscal third quarter that ended March 31, 2023, while its gross profit stood at $103.79 million, up marginally year-over-year. The company’s income from operations grew 20.8% from the year-ago quarter to $34.34 million.

Its non-GAAP net income grew marginally year-over-year to $25.63 million, while its non-GAAP EPS rose 4.2% from the year-ago quarter to $1.49. As of March 31, 2023, OSIS’ total current liabilities stood at $550.41 million, compared to $613.94 million as of June 30, 2022.

The consensus revenue and EPS estimates of $308.95 million and $1.22 for the fiscal first quarter ending September 2023 indicate 15.3% and 40.2% year-over-year improvements, respectively. Furthermore, it surpassed the consensus EPS estimates in each of the trailing four quarters.

OSIS’ shares have gained 47% year-to-date to close its last trading session at $116.90. Over the past six months, the stock gained 24.2%.

OSIS’ POWR Ratings reflect a robust outlook. It has an overall B rating, which equates to Buy in our POWR Ratings system.

It has a B grade for Value and Sentiment. It is ranked #6 within the Air/Defense Services industry.

We have rated OSIS for Growth, Momentum, Stability, and Quality. Get all OSIS ratings here.

Willis Lease Finance Corporation (WLFC)

WLFC operates as a lessor and servicer of commercial aircraft and aircraft engines globally through two segments: Leasing and Related Operations; and Spare Parts Sales.

Institutions hold roughly 36.9% of WLFC shares. Of the 52 institutional holders, 27 have increased their positions in the stock. Moreover, 10 institutions have taken new positions in the stock.

On July 12, WLFC announced an innovative project to develop and produce Power-to-Liquid (PtL) Sustainable Aviation Fuel (SAF). Most notably, the company, its subsidiary, Willis Sustainable Fuels (UK) Limited, and financial and strategic partners are advancing plans toward a new SAF refinery in northeastern England.

PtL SAF project is set to bolster the global aviation sector's commitment toward achieving net-zero emissions by 2050, a significant stride to decarbonize aviation operations.

Moreover, WLFC has committed to and invested approximately $1.5 billion in cutting-edge technology and lower fuel consumption engines over the past few years. This underscores WLFC's dedication to environmental responsibility and is expected to yield positive outcomes.

On February 3, 2023, WLFC announced that its UK subsidiary, Willis Aviation Services Limited (WASL), has expanded its service offerings to include UK CAA base maintenance approvals for the Airbus A320 family, Boeing 737NG, ATR 42/72, and Embraer 135/145 aircraft. This expansion strengthens WLFC’s vertical integration strategy, encompassing engine and aircraft Maintenance, Repair, and Overhaul (MRO) services.

WLFC’s trailing-12-month gross profit and EBIT margins of 95.36% and 32.64% are 214.4% and 235% higher than the industry averages of 30.33% and 9.74%, respectively. Also, its trailing-12-month CAPEX/Sales of 78.46% is significantly higher than the 2.94% industry average.

Its revenue has grown at a 5.1% CAGR over the past five years, while its total assets and tangible book value have grown at CAGRs of 5.6% and 4.2%, respectively, over the past three years.

For the fiscal second quarter that ended June 30, 2023, WLFC’s total revenue increased 39.6% year-over-year to $109 million, with lease rent revenue of $54.42 million, up 48.3% from the year-ago quarter. Its income from operations grew 105% from the prior-year quarter to $19.44 million.

The company’s net income attributable to common shareholders and income per common share amounted to $12.98 million and $2.02, up 155.8% and 149.4% year-over-year, respectively.

Over the past year, the stock has gained 12.7% to close the last trading session at $45.01. The stock gained 13% over the past month.

WLFC’s 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 has a B grade for Growth, Value, and Sentiment. Within the same industry, it is ranked #5.

Click here to see WLFC’s Momentum, Stability, and Quality ratings.

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ESLT shares were trading at $208.09 per share on Tuesday morning, up $2.25 (+1.09%). Year-to-date, ESLT has gained 27.40%, versus a 17.31% 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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