We recently published a list of 7 Most Undervalued Defense Stocks To Buy According To Analysts. In this article, we are going to take a look at where Smith & Wesson Brands, Inc. (NASDAQ:SWBI) stands against the other 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.
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).
An overhead aerial shot of a gunsmiths workshop, surrounded by tools of the trade.
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.
Overall SWBI ranks 2nd on our list of most undervalued defense stocks to buy according to analysts. While we acknowledge the potential of SWBI as an investment, 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 SWBI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.