The Israel-Hamas war has led to a surge in global defense budgets amid instabilities and warfare complexity. This has led to a greater focus on strengthening air defense capabilities to protect against potential threats and maintain national security. Also, advancements in technology have played a crucial role in driving the growth of the air defense system market as countries seek more sophisticated and effective defense solutions.

Given the industry’s growth prospects, investors could consider buying fundamentally sound defense stocks CPI Aerostructures, Inc. (CVU), Textron Inc. (TXT) and Willis Lease Finance Corporation (WLFC) for solid returns.

The aerospace and defense industries are undergoing significant transformations as executives understand the potential of AI to improve their operations and increase market share.

According to a recent CxO Pulse of Change poll, C-suite executives worldwide trust in the power of new AI technology, like generative AI and anticipate it to impact their organizations. AI integration is predicted to increase market share and promote innovation, with 81% of executives expecting commercial benefits within three years.

Moreover, according to the Aerospace & Defense Global Market Report 2022, the aerospace and defense market is expected to reach $1.05 trillion in 2026 at a CAGR of 8.5%. Investors’ interest in defense stocks is evident from the SPDR S&P Aerospace & Defense ETF’s (XAR) 11.7% returns over the past six months.

In light of these encouraging trends, let’s look at the fundamentals of the three Air/Defense Services stocks, beginning with number 3.

Stock #3: CPI Aerostructures, Inc. (CVU)

CVU engages in the contract production of structural aircraft parts for fixed-wing aircraft and helicopters in the commercial and defense markets.

CVU’s trailing-12-month EV/Sales multiple of 0.65 is 61.5% lower than the industry average of 1.70. Its trailing-12-month EV/EBIT multiple of 11.26% is 31.3% lower than the industry average of 16.38.

CVU’s trailing-12-month ROCE of 407.19% is significantly higher than the industry average of 12.30%. Its trailing-12-month net income margin of 10.66% is 75.4% higher than the industry average of 6.08%.

CVU’s revenue for the fiscal third quarter that ended September 30, 2023, increased marginally year-over-year to $20.40 million. The company’s gross profit came in at $3.71 million.

As of September 30, 2023, its total current assets stood at $45.13 million, compared to $43.20 million as of December 31, 2022.

CVU’s shares has gained marginally intraday to close the last trading session at $2.64.

CVU’s POWR Ratings reflect this promising outlook. The stock 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.

CVU also has an A grade for Value and a B grade for Sentiment and Momentum. It is ranked #11 out of 72 stocks in the Air/Defense Services industry. Click here for the additional POWR Ratings for Growth, Value, Stability and Quality for CVU.

Stock #2: Textron Inc. (TXT)

TXT operates in the aircraft, defense, industrial, and finance businesses worldwide. It operates through six segments: Textron Aviation; Bell; Textron Systems; Industrial; Textron aviation; and Finance.

TXT’s forward non-GAAP P/E multiple of 14.01 is 21.6% lower than the industry average of 17.86. Its forward EV/EBIT multiple of 7.07% is 8.4% lower than the industry average of 15.72.

TXT’s trailing-12-month levered FCF margin of 6.41% is 7.2% higher than the industry average of 5.98%. Its trailing-12-month net income margin of 10.66% is 16.3% higher than the industry average of 6.08%.

For the third quarter that ended September 30, 2023, TXT’s total revenues increased 8.6% year-over-year to $3.34 billion. Its adjusted income from continuing operations rose 20.7% over the prior-year quarter to $297 million. Its adjusted EPS from continuing operations came in at $1.49, representing an increase of 29.6% year-over-year.

Street expects TXT’ revenue to increase 6.8% year-over-year to $13.74 billion for the year ending December 2023. Its EPS is expected to grow 36.4% year-over-year to $5.47 for the same period. It surpassed EPS estimates in three of four trailing quarters. Shares of TXT has gained 19.9% over the past six months to close the last trading session at $76.25.

TXT’s strong fundamentals is reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.

It has a B grade for Growth, Value, Momentum and Quality. It ranks #2 in the same industry. Click here to access additional TXT ratings (Stability, and Sentiment).

Stock #1: Willis Lease Finance Corporation (WLFC)

WLFC operates as a lessor and servicer of commercial aircraft and aircraft engines worldwide. The company operates through two segments, Leasing and Related Operations and Spare Parts Sales.

WLFC’s trailing-12-month EV/Sales multiple of 5.48 is 223.04% lower than the industry average of 1.70. Its trailing-12-month EV/EBIT multiple of 16.20% is marginally lower than the industry average of 16.38.

WLFC’s trailing-12-month EBITDA margin of 57.46% is 318.9% higher than the industry average of 13.72%. Its trailing-12-month EBIT margin of 33.80% is 102.1% higher than the industry average of 9.68%.

During the fiscal third quarter ended September 30, 2023, WLFC’s total revenue increased 37.5% year-over-year to $105.75 billion. Its net income attributable to common shareholders came in at $13.78 million, up 148.3% from in the previous-year quarter. Its income per common share came increased 139.2% year-over-year to $2.13 for the same period.

The stock has gained 13.9% over the past six months to close the last trading session at $47.50.

It’s no surprise that WLFC has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has a B grade for Growth, Value, Momentum, Sentiment and Quality. It is ranked first in the same industry.

Beyond what is stated above, we’ve also rated WLFC for Stability. Get all WLFC ratings here.

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WLFC shares were trading at $47.20 per share on Friday morning, down $0.30 (-0.63%). Year-to-date, WLFC has declined -20.01%, versus a 21.51% rise in the benchmark S&P 500 index during the same period.

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.

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