The ever-changing and dynamic landscape of threats in today's world highlights the paramount importance of continuous innovation in aerospace and defense technologies. Companies within this sector are making substantial investments in research and development, positioning themselves as pioneers in advancing technological capabilities.
Against the backdrop, in this piece, we explore the fundamentals of three defense companies, Northrop Grumman Corporation (NOC), CACI International Inc (CACI), and CAE Inc. (CAE), which are well equipped to capitalize on the industry prospects.
The defense industry gained the spotlight amid escalating geopolitical tensions such as the Israel-Hamas and Russia-Ukraine conflicts. As geopolitical tensions intensify and nations prioritize military readiness, there is a tendency for an uptick in defense spending, presenting potential benefits for companies within this industry.
Projections indicate that defense spending in the United States will climb each year until 2033 to hit a whopping $1.10 trillion. Last year, the defense spending in the United States reached $746 billion.
Meanwhile, for 2024, the United States Congress authorized an enormous defense budget of $886 billion to “enhance US deterrence and defense posture in the Indo-Pacific region” and counter the growing influence of China in that area.
Furthermore, the outlook for the defense industry is strengthened by the extensive integration of technology. Aerospace and defense firms, for instance, are actively engaging in the exploration and adoption of digital technologies, specifically Artificial Intelligence (AI), across diverse scenarios.
AI has demonstrated its benefits across various applications in the aerospace and defense sector, from improving cockpit avionics technology for surveillance and decision-making to streamlining maintenance processes and defect monitoring for manufacturers.
The AI and robotics in aerospace and defense market is anticipated to reach $31.90 billion in 2024 and increase to $45.80 billion in 2029, demonstrating a 7.5% CAGR from 2024 to 2029.
Given the industry tailwinds, investors could consider buying the shares of NOC, CACI, and CAE for potential gains this month. That said, let’s now dive deeper into the fundamentals of these Air/Defense Services stocks, beginning with number three.
Stock #3: Northrop Grumman Corporation (NOC)
NOC operates as an aerospace and defense company worldwide. The company operates through four segments: Aeronautics Systems; Defense Systems; Mission Systems; and Space Systems.
On December 13, 2023, NOC paid its shareholders a quarterly dividend of $1.87 per share. The company’s annual dividend of $7.48 translates to a 1.58% yield on the prevailing prices, while its four-year average dividend yield is 1.58%.
Its dividend payouts have grown at CAGRs of 8.9% and 9.3% over the past three and five years, respectively. Also, NOC has a record of 20 years of consecutive dividend growth.
For the fiscal third quarter, which ended on September 30, 2023, NOC’s total sales increased 8.9% year-over-year to $9.78 billion, while its total operating income rose 20.4% from the year-ago value to $1.02 billion.
Moreover, the company’s net earnings amounted to $937 million and $6.18 per share, up 2.4% and 4.9% from the prior-year quarter, respectively. Also, its comprehensive income improved 3.5% year-over-year to $940 million.
Analysts predict NOC’s revenue for the fiscal fourth quarter (ended December 2023) to increase 3.9% year-over-year to $10.42 billion, while its EPS for the same period is expected to come in at $5.80. Furthermore, its EPS is projected to improve by 1.9% annually over the next five years.
Additionally, the company has an excellent surprise history, surpassing the EPS and revenue estimates in each of the trailing four quarters.
Over the past three months, NOC’s shares have gained 9.3% to close the last trading session at $474.88.
NOC’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Momentum and Stability. In the 73-stock Air/Defense Services industry, it is ranked #22. Click here to see NOC’s ratings for Growth, Value, Sentiment, and Quality.
Stock #2: CACI International Inc (CACI)
CACI provides expertise and technology to enterprise and mission customers in support of national security missions and government modernization/transformation in the intelligence, defense, and federal civilian sectors. It operates through two segments: Domestic Operations and International Operations.
On December 19, 2023, CACI secured a five-year task order to support the Defense Intelligence Agency (DIA) National Center for Medical Intelligence (NCMI). The contract falls under the Defense Medical Intelligence and Global Health Security (DMIGHS) program, aiming to enhance NCMI's capabilities in delivering medical intelligence on global health threats and safeguarding U.S. interests.
In the same month, CACI secured a five-year, single-award task order worth up to $420 million. The contract supports the U.S. Army Combat Capabilities Development Command (DEVCOM), specifically the Command, Control, Communications, Computers, Cyber, Intelligence, Surveillance & Reconnaissance (C5ISR) Center, and the Engineering and Systems Integration (ESI) Directorate.
Commenting upon this, CACI’s President and Chief Executive Officer, John Mengucci, said, “We are honored to deliver innovative expertise to combat these ever-evolving, advanced threats and support our customers in enabling and accelerating critical, mission-specific information and solutions.”
In the fiscal 2024 first quarter, which ended on September 30, 2023, CACI’s revenue increased 15.2% year-over-year to $1.85 billion. Its income from operations grew 3.4% from the year-ago value to $137.35 million.
During the same period, the company’s adjusted net income and adjusted EPS came in at $99.73 million and $4.36, respectively. Furthermore, its cash and cash equivalents stood at $125.55 million, up 8.4% compared to $115.78 million as of June 30, 2023.
The consensus revenue estimate of $1.84 billion for the fiscal second quarter (ended December 2023) reflects an 11.7% year-over-year improvement. The consensus EPS estimate of $4.53 for the same period indicates a 5.9% year-over-year rise. Moreover, the company topped its revenue estimates in three of the trailing four quarters, which is promising.
The stock gained 1.8% over the past three months to close the last trading session at $315.55.
CACI’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has a B grade for Stability. Within the same industry, it is ranked #21. Click here to see the other ratings of CACI for Growth, Value, Momentum, Sentiment, and Quality.
Stock #1: CAE Inc. (CAE)
Headquartered in Saint-Laurent, Canada, CAE provides simulation training and critical operations support solutions in Canada, the United States, the United Kingdom, Europe, Asia, Oceania and Africa, and the Rest of the Americas. It operates through three segments: Civil Aviation; Defense and Security; and Healthcare.
On December 13, 2023, CAE and Riyadh Air agreed to acquire two advanced Boeing 787 CAE7000XR Full-Flight Simulators (FFS) along with a Boeing 787 Flight Training Device (FTD) to facilitate the training needs of the new airline scheduled to launch in 2025.
The simulators are scheduled to be deployed in 2024 at a specially designed facility within the newly established College of Aviation and Space in Riyadh, Saudi Arabia, in collaboration with Prince Sultan University.
Through this unified effort, CAE, Riyadh Air, and Prince Sultan University aspire to establish elevated benchmarks for pilot training and aviation safety in Saudi Arabia.
On November 21, 2023, CAE initiated a research project in collaboration with UNSW (University of New South Wales) under the Australian Government’s Department of Education Trailblazer Universities Program. Together, they aim to create an innovative assessment system utilizing modern learning methods and artificial intelligence to enhance the training and performance of Australia’s Mission Aircrew.
This project is a part of the Defence Trailblazer program, focusing on expediting and commercializing innovative solutions to meet the crucial training and operational needs of the Australian Defence Force (ADF).
For the fiscal 2024 second quarter, which ended on September 30, 2023, CAE’s revenue increased 9.6% year-over-year to C$1.09 billion ($816.96 million), while its operating income amounted to C$100.60 million ($75.40 million). The company’s attributable net income rose 31.2% from the year-ago value to C$58.40 million ($40.77 million). In addition, its EPS came in at C$0.18, up 28.6% year-over-year.
Street expects CAE’s revenue for the third quarter (ended December 2023) to increase 4.9% year-over-year to $802.73 million, while its EPS for the same quarter is projected to come in at $0.19. Furthermore, its EPS is anticipated to improve by 12.4% per annum over the next five years.
The company surpassed its revenue estimates in three of the trailing four quarters and EPS estimates in each of the trailing four quarters, which is impressive.
CAE’s shares have surged 2.1% over the past month to close the last trading session at $20.85.
It’s no surprise that CAE has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Sentiment and a B for Momentum and Stability. Out of 73 stocks in the same industry, it is ranked #15.
In addition to the POWR Ratings we’ve stated above, we also have CAE’s ratings for Growth, Value, and Quality. Get all CAE ratings here.
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NOC shares were trading at $480.64 per share on Thursday morning, up $5.76 (+1.21%). Year-to-date, NOC has gained 2.67%, versus a -0.98% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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