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.
05. Sturm, Ruger & Company, Inc. (NYSE:RGR)
Upside Potential: 24.24%
Forward Price to Earnings (P/E) Ratio: 14.23
Number of Hedge Fund Holders: 14
Sturm, Ruger & Company, Inc. (NYSE:RGR) stands out as a compelling candidate in the defense sector, known for its design, manufacturing, and sales of firearms across the United States. The company operates through two main segments: Firearms and Castings. With a diverse range of products, including rifles, pistols, and revolvers, Sturm Ruger has established itself as a trusted name in the firearms industry, making it a valuable addition to any portfolio focused on defense stocks.
In its Q2 2024 earnings call, Sturm, Ruger & Company, Inc. (NYSE:RGR) reported net sales of $130.8 million and diluted earnings of $0.47 per share, showcasing resilience in a challenging market. Although sales have declined compared to the previous year, the company’s proactive measures—such as increasing production by 18% and focusing on efficiency—have positively impacted profitability. The company’s robust financial position is highlighted by its $106 million in cash and short-term investments, zero debt, and a current ratio of 4.8 to 1, ensuring it has ample liquidity to capitalize on future opportunities.
The commitment to shareholder returns is evident, as Sturm, Ruger & Company, Inc. (NYSE:RGR) returned $27.1 million to shareholders in the first half of 2024 through dividends and share repurchases, indicating strong confidence in its business model. Notably, new product sales constituted 31% of total firearm sales in the first half of 2024, reflecting the company’s innovative approach. Recent product launches, such as the American Rifle Generation II and Marlin lever-action rifles, have generated strong demand, leading to a significant reduction in inventory levels.
Looking forward, Sturm, Ruger & Company, Inc. (NYSE:RGR) disciplined pricing strategy and focus on innovation position it well for long-term growth. As demand stabilizes and production ramps up, the company is poised to leverage its strong market presence. Analysts view Sturm Ruger as undervalued, suggesting that the stock is an attractive buy for those seeking exposure to the defense sector. Overall, Sturm, Ruger & Company, Inc. (NYSE:RGR) solid fundamentals, commitment to shareholder value, and innovative product pipeline make it a prime candidate for investment in the defense industry.
04. Textron Inc. (NYSE:TXT)
Upside Potential: 25.57%
Forward Price to Earnings (P/E) Ratio: 12.35
Number of Hedge Fund Holders: 26
Textron Inc. (NYSE:TXT), a diversified global company headquartered in Providence, Rhode Island, operates across various sectors, including aircraft, defense, industrial, and finance. With six primary segments, Textron Aviation, Bell, Textron Systems, Industrial, Textron eAviation, and Finance, Textron Inc. (NYSE:TXT) offers a broad range of products and services, from business jets and military helicopters to unmanned systems and advanced marine crafts. Given its robust defense capabilities and consistent growth trajectory along with a forward P/E ratio of 12.35, Textron Inc. (NYSE:TXT) should be featured prominently on the list of undervalued defense stocks.
In the second quarter of 2024, Textron Inc. (NYSE:TXT) exceeded earnings expectations with an EPS of $1.54, compared to analysts’ forecasts of $1.49, reflecting strong operational performance. The company reported total revenues of $3.5 billion, an increase from $3.4 billion in the same quarter last year. Manufacturing cash flow before pension contributions reached $320 million, up significantly from $242 million in Q2 2023, indicating improved operational efficiency and cash generation.
Textron Aviation remains a critical growth driver, achieving revenues of $1.5 billion and segment profits of $195 million—up $24 million year-over-year. The backlog in this segment reached an impressive $7.5 billion, reflecting robust demand for Textron Inc. (NYSE:TXT) products, including commercial turboprops and military trainer aircraft. Furthermore, the recent delivery of the King Air 260 under the U.S. Navy’s multi-engine training systems contract exemplifies Textron’s ability to secure lucrative defense contracts.
The Bell segment also showed promising results, with revenues of $794 million and a profit of $82 million, primarily driven by increased military volumes related to the FLRAA program. The positive momentum in military contracts, coupled with Bell’s leadership in tiltrotor technology, positions Textron for sustained growth in defense markets.
Textron Systems, while facing some challenges, remains vital with revenues of $323 million and a backlog of $1.7 billion. The ongoing collaboration with Kodiak Robotics for the U.S. Army’s robotic combat vehicle competition underscores Textron’s commitment to innovation and its strategic alignment with military needs.
Overall, Textron Inc. (NYSE:TXT) strong financial metrics, growing backlog, and strategic initiatives in defense and aviation make it a compelling investment opportunity in the defense sector. As the company continues to leverage its diversified portfolio and capitalize on growing defense spending, Textron Inc. (NYSE:TXT) stands out as a valuable addition to the list of undervalued defense stocks to buy now.
03. Triumph Group, Inc. (NYSE:TGI)
Upside Potential: 32.08%
Forward Price to Earnings (P/E) Ratio: 14.06
Number of Hedge Fund Holders: 25
Triumph Group, Inc. designs, engineers, manufactures, repairs, overhauls, and distributes aircraft, aircraft components, accessories, subassemblies, and systems worldwide. It operates in two segments, Triumph Systems & Support, and Triumph Interiors. Triumph Group, Inc. (NYSE:TGI) was incorporated in 1993 and is headquartered in Radnor, Pennsylvania. Triumph Group, Inc. (NYSE:TGI) stands out as a compelling investment opportunity within the defense sector, especially considering its recent strategic initiatives and robust market fundamentals. As a leading provider of aerospace and defense systems, Triumph Group, Inc. (NYSE:TGI) is well-positioned to capitalize on the growing demand for advanced military solutions and commercial aerospace components.
The company recently reported strong quarterly earnings, exceeding analysts’ expectations and showcasing impressive revenue growth driven by both defense and commercial aerospace segments. Triumph Group, Inc. (NYSE:TGI) defense segment, which accounts for a significant portion of its revenues, has seen increased demand due to heightened defense spending amid geopolitical tensions. The U.S. government’s commitment to modernizing military capabilities presents a substantial growth opportunity for Triumph Group, Inc. (NYSE:TGI), particularly in areas like aircraft modernization, maintenance, and logistics support.
Additionally, Triumph Group, Inc. (NYSE:TGI) has undertaken significant restructuring efforts to streamline operations and reduce costs. This focus on operational efficiency is expected to improve margins and enhance profitability, making the company more competitive in a challenging market environment. Furthermore, the company’s strategic partnerships with major defense contractors and government agencies solidify its position as a trusted provider of critical components and systems.
Analysts also point to Triumph Group, Inc. (NYSE:TGI) strong balance sheet, which provides the flexibility to invest in innovative technologies and expand its service offerings. With a current valuation that appears undervalued compared to its peers, Triumph offers an attractive entry point for investors looking to gain exposure to the defense sector.
In summary, Triumph Group, Inc. (NYSE:TGI) represents a strong investment case, backed by its strategic positioning, solid earnings growth, and operational enhancements. As defense spending continues to rise, Triumph Group, Inc. (NYSE:TGI) is poised to deliver significant returns, making it a must-consider stock for investors seeking undervalued opportunities in the defense industry.
02. Smith & Wesson Brands, Inc. (NASDAQ:SWBI)
Upside Potential: 43.50%
Forward Price to Earnings (P/E) Ratio: 10.2
Number of Hedge Fund Holders: 17
Smith & Wesson Brands, Inc. (NASDAQ:SWBI) is a key player in the global firearms industry, designing, manufacturing, and selling a diverse range of firearms, including handguns, long guns, and firearm-related products. Established in 1852 and headquartered in Springfield, Massachusetts, the company has built a strong reputation for quality and reliability, appealing to various customer segments, including firearm enthusiasts, collectors, and law enforcement agencies. Given its robust product portfolio and strategic market positioning, Smith & Wesson Brands, Inc. (NASDAQ:SWBI) deserves a spot on any list of undervalued defense stocks.
In the recent Q1 fiscal 2025 earnings call, Smith & Wesson Brands, Inc. (NASDAQ:SWBI) reported net sales of $88.3 million, marking a 22.7% decline from the previous year. This reduction was primarily attributed to weaker firearms demand and broader inflationary pressures affecting consumer discretionary spending. However, despite these challenges, the company demonstrated its resilience by maintaining a gross margin of 27.4%, a slight improvement from the prior year, aided by higher fixed cost absorption and effective cost management. Moreover, the firm’s disciplined approach allowed it to deliver nearly $10 million in EBITDAS during the quarter, further highlighting its operational strength.
Looking ahead, Smith & Wesson Brands, Inc. (NASDAQ:SWBI) is optimistic about a rebound in demand, particularly as the typically busy fall season approaches. The introduction of new products, such as the highly anticipated Bodyguard 2.0 and continued success with the 1854 lever action rifle, reflects the company’s commitment to innovation and market responsiveness. Notably, over 41% of first-quarter sales came from new product introductions, signaling strong consumer interest and brand loyalty.
Financially, the company has proactively managed its balance sheet, accelerating share repurchases with nearly $13 million spent in Q1 alone and authorizing a new $50 million buyback program. This commitment to returning capital to shareholders, combined with expectations for top and bottom line growth in the coming quarters, positions Smith & Wesson Brands, Inc. (NASDAQ:SWBI) as a compelling investment in the defense sector. Overall, despite current challenges, Smith & Wesson Brands, Inc. (NASDAQ:SWBI) strong fundamentals, strategic innovations, and sound capital allocation suggest significant long-term growth potential, making it an attractive choice for investors looking at undervalued defense stocks.
01. Innovative Solutions and Support, Inc. (NASDAQ:ISSC)
Upside Potential: 46.59%
Forward Price to Earnings (P/E) Ratio: 13.02
Number of Hedge Fund Holders: 6
Innovative Solutions and Support, Inc. (NASDAQ:ISSC), a prominent systems integrator specializing in flight guidance and cockpit display systems, presents a compelling investment opportunity in the defense sector. The company’s strategic focus on advanced technology solutions and a robust growth trajectory makes it an ideal candidate for inclusion in the list of undervalued defense stocks.
For the third quarter of fiscal 2024, Innovative Solutions and Support, Inc. (NASDAQ:ISSC) reported impressive results, achieving a remarkable 48% year-over-year revenue growth, propelled by contributions from recently acquired Honeywell product lines and robust performance across existing platforms. Total net revenues reached $11.8 million, reflecting strong demand in military and general aviation markets. This growth underscores the company’s successful integration of the Honeywell assets, which is expected to enhance its revenue by 40% and EBITDA by 75% over the long term.
The company’s gross profit increased to $6.3 million, resulting in a gross margin of 53.4%. This improvement is attributed to operational efficiencies and effective integration of the Honeywell products. Notably, Innovative Solutions and Support, Inc. (NASDAQ:ISSC) adjusted EBITDA grew to $3.1 million, with an adjusted EBITDA margin of 26.1%, indicating the company’s ability to manage costs while expanding its revenue base.
Innovative Solutions and Support, Inc. (NASDAQ:ISSC) strategic initiatives emphasize military market penetration, evidenced by securing a multi-million dollar contract for multifunction displays on a foreign military platform. This contract not only validates ISSC’s defense strategy but also opens doors to further opportunities in this lucrative sector. With increasing automation in military and commercial aviation, the company is well-positioned to capitalize on a multi-billion dollar addressable market.
Moreover, the firm has a solid financial foundation, characterized by strong cash flow and a focus on strategic acquisitions that complement its existing product lines. The recent acquisition of additional Honeywell product lines strengthens its offerings in military and business aviation, enhancing its competitive edge.
In summary, Innovative Solutions and Support, Inc. (NASDAQ:ISSC) impressive financial metrics, strategic growth initiatives, and expanding market presence underscore its potential as a solid investment in the defense sector. Analysts recognize the company’s capacity for sustained growth, making Innovative Solutions and Support, Inc. (NASDAQ:ISSC) a noteworthy addition to any portfolio focused on undervalued defense stocks.
While we acknowledge the potential of ISSC to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ISSC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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