In this piece, we will take a look at seven most undervalued defense stocks to buy according to analysts.
As we approach 2025 and beyond, the defense industry finds itself at a pivotal moment, characterized by a convergence of technological breakthroughs, shifting geopolitical landscapes, and heightened spending from both public and private sectors. This unique environment is set to shape the future of aerospace and defense (A&D), presenting significant growth opportunities for firms that are strategically positioned and innovative. In this article, we will delve into the most undervalued stocks to buy in the defense sector.
Deloitte highlights a significant evolution in the defense sector driven by the emergence of supersonic and hypersonic technologies. At the forefront of this transformation is NASA’s X-59 QueSST program, which aims to minimize sonic boom intensity, redefining high-speed aviation. While still in its early stages, manufacturers are optimistic, evidenced by substantial investments and partnerships with major airlines. This optimism suggests that supersonic travel could evolve into a viable economic solution rather than merely a technological novelty.
In addition to supersonic advancements, hypersonic technology is gaining momentum within the defense sector, driven by various offensive and defensive needs. The U.S. Department of Defense (DOD) has dedicated significant resources in its fiscal year 2024 budget to develop hypersonic capabilities, including glide vehicles and cruise missiles. As these technologies approach operational readiness, defense firms are likely to expedite the development of hypersonic weapon systems, potentially boosting sector growth in the coming years.
The aerospace and defense (A&D) industry is expected to grow as a result of combined defense and commercial spending. With geopolitical tensions escalating, the demand for next-generation defense capabilities is reaching unprecedented heights. The global defense budget surpassed $2.24 trillion in 2022, and the DOD has requested $842 billion for fiscal year 2024, reflecting a 3.2% increase from the previous year. This funding surge is anticipated to stimulate innovation in critical areas such as artificial intelligence (AI), advanced technologies, and the modernization of military vehicles.
Investors should focus on companies within the defense supply chain, particularly those involved in research and development of cutting-edge defense technologies. The DOD’s focus on AI, microelectronics, quantum computing, and advanced propulsion systems is set to spur rapid advancements. By concentrating on these areas, defense companies can maintain a competitive edge, offering numerous opportunities for investors looking to tap into the sector’s growth potential.
Moreover, the space sector is becoming an increasingly vital aspect of the A&D industry’s future. U.S. investment in space-related defense initiatives has significantly increased, with the U.S. Space Force (USSF) requesting $30.1 billion for fiscal year 2024—a 15% rise from the previous year. This trend is expected to persist into 2025 and beyond as the U.S. seeks to secure its strategic advantage in space, with investments in cybersecurity and resilient space forces remaining critical for sustainable growth.
Despite the promising outlook for the defense industry, challenges such as inflation could present obstacles. Rising material and production costs may offset the DOD’s nominal budget increase of 3.2% for fiscal year 2024, particularly as inflation rates hover around 6%. This situation might restrict the DOD’s capacity to initiate new missions or advance certain technologies, necessitating resource reallocation for essential operational costs. Nevertheless, firms prioritizing innovation and supply chain efficiency are likely to develop strategies to mitigate these challenges.
Additionally, the commercial aerospace sector is poised for significant investments in the near future. As passenger traffic returns to pre-pandemic levels, new aircraft orders are expected to surge, driving increased spending on digitalization, product development, and next-generation technologies, including Advanced Air Mobility (AAM). Companies that effectively tap into these emerging markets will be well-positioned to benefit from the broader recovery of the aerospace industry.
In conclusion, the A&D industry is at a transformative stage, driven by technological innovation, geopolitical dynamics, and evolving market demands. The companies that can effectively navigate these changes, by embracing technological advancements, adapting to geopolitical shifts, and addressing inflationary challenges, will be best positioned for long-term success. In this article, we will explore the top seven undervalued defense stocks poised for growth, spotlighting companies that are seizing opportunities in emerging technologies, expanding their market presence, and delivering strong financial results.
Photo by Kevin Schmid on Unsplash
Our Methodology
For this article, we used the Finviz stock screener to identify companies in the defense industry with a forward Price-to-Earnings (P/E) ratio of less than 15 as of October 7, 2024. We then reviewed the price targets set by analysts for each stock and compared them to their respective closing prices on October 7 to evaluate the upside potential. Additionally, we analyzed data from approximately 912 elite hedge funds tracked by Insider Monkey during the second quarter of 2024 to assess hedge fund ownership of each company. The stocks are ranked in ascending order based on their upside potential.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
07. V2X, Inc. (NYSE:VVX)
Upside Potential: 3.39%
Forward Price to Earnings (P/E) Ratio: 11.79
Number of Hedge Fund Holders: 16
V2X, Inc. (NYSE:VVX) stands out as a compelling investment in the defense sector, providing mission-critical solutions and support services to defense clients across the globe. Established in 2014 and headquartered in McLean, Virginia, V2X, Inc. (NYSE:VVX) has positioned itself as a leader in delivering integrated solutions in operations, logistics, aerospace, training, and technology markets. The company’s diverse portfolio caters to national security, defense, civilian, and international clients, making it a valuable player in the evolving defense landscape.
In its Q2 2024 earnings call, V2X, Inc. (NYSE:VVX) reported record revenues of $1.1 billion, reflecting a robust 10% year-over-year growth. This impressive performance was primarily driven by expanding operations in the Pacific and Middle East regions, underscoring the company’s strategic focus on high-demand markets. The adjusted EBITDA margin stood at 6.7%, with adjusted diluted earnings per share (EPS) of $0.83, slightly below analyst expectations of $0.84. However, absent the impact of executive transition costs, adjusted EPS would have been approximately $0.88, showcasing the company’s underlying financial strength.
With a total backlog of $12.2 billion, equating to approximately three times the midpoint of revenue guidance, V2X demonstrates substantial revenue visibility. The company has secured several noteworthy contracts valued at over $4 billion, including a significant $3 billion award aimed at enhancing readiness capabilities. These contracts illustrate V2X, Inc. (NYSE:VVX) commitment to developing innovative solutions, such as the Gateway Mission Routers, which enable real-time situational awareness and assured communications, critical for U.S. Department of Defense initiatives.
Furthermore, V2X is well-positioned to capitalize on increased defense spending, particularly in the Pacific region, with the Department of Defense requesting a substantial budget increase as part of its deterrence strategy. V2X, Inc. (NYSE:VVX) operational intimacy and past performance reinforce its capacity to adapt to emerging mission requirements, enhancing its competitive edge in the marketplace.
In summary, V2X, Inc. (NYSE:VVX) embodies significant growth potential, driven by strategic contracts, a strong backlog, and a commitment to technological innovation. As a leader in mission solutions for the defense sector, V2X, Inc. (NYSE:VVX) deserves a spot on any list of undervalued defense stocks poised for future growth.
06. Huntington Ingalls Industries, Inc. (NYSE:HII)
Upside Potential: 11.47%
Forward Price to Earnings (P/E) Ratio: 13.71
Number of Hedge Fund Holders: 25
Huntington Ingalls Industries, Inc. (NYSE:HII), a leader in military shipbuilding and defense solutions, should be a prime candidate for inclusion in the list of undervalued defense stocks. Founded in 1886 and headquartered in Newport News, Virginia, the company specializes in designing, constructing, overhauling, and repairing military vessels for the U.S. Navy and Coast Guard, covering a range of non-nuclear and nuclear-powered ships. The company operates through three segments: Ingalls, Newport News, and Mission Technologies, providing a diverse portfolio of services, including advanced naval nuclear support and cutting-edge technology solutions in areas like artificial intelligence and electronic warfare.
Huntington Ingalls Industries, Inc. (NYSE:HII) recently reported exceptional Q2 2024 results, with revenues hitting $3 billion—a 6.8% increase year-over-year. The company’s diluted earnings per share (EPS) surged to $4.38, surpassing analysts’ expectations of $3.55 and marking a 34% increase from the prior year. Notably, the Mission Technologies segment achieved a record $765 million in sales, up 19% from the same quarter last year. With a robust backlog of $48.5 billion, of which $27 billion is funded, the company has strong visibility into future revenue streams.
The solid operating performance is underscored by an operating income of $189 million and an operating margin of 6.3%, indicating a healthy operational framework. Furthermore, with new contract awards totaling $3.1 billion, the company continues to capitalize on its alignment with national security strategies. The Mission Technologies segment’s trailing twelve-month book-to-bill ratio of 1.15 and an opportunity pipeline exceeding $83 billion demonstrate significant growth potential in a competitive market.
Huntington Ingalls Industries, Inc. (NYSE:HII) focus on labor stability and efficient resource allocation is likely to bolster its production capabilities. The company has also committed to significant capital investments and employee development, aiming to enhance performance and meet delivery commitments. The ongoing bipartisan support for defense appropriations further solidifies the company’s position within the sector.
In conclusion, Huntington Ingalls Industries, Inc. (NYSE:HII) presents a compelling investment opportunity within the defense sector, characterized by solid financial performance, robust order backlog, and strategic alignment with national security priorities. As defense budgets continue to grow, Huntington Ingalls Industries, Inc. (NYSE:HII) is poised to deliver strong returns, making it a must-consider stock for investors looking to capitalize on the rising demand for military capabilities.