Last year, global defense spending surged to record highs of $2.44 trillion. This is not surprising, as geopolitical frictions are on the rise. It’s also likely that defense spending will continue to trend higher through the decade.
Therefore, it’s still a good time to consider exposure to some promising defense stocks. These three defense stocks to buy represent companies other than the blue-chip majors. Considering the industry potential, these defense ideas can deliver multibagger returns in the next three to five years.
Elaborating on the growth potential, defense spending in 2023 was $2.44 trillion. It’s expected that by 2030, the top five countries’ expenditures on defense will be $1.9 trillion. Global defense spending will be significantly higher than current levels. One estimate suggests that defense spending will increase at a CAGR of 4.9% between 2023 and 2028.
Let’s, therefore, talk about three defense stocks to buy and hold for massive value creation.
Leonardo DRS (DRS)
Leonardo DRS (NASDAQ:DRS) is an under-the-radar defense stock with immense potential. DRS stock has trended higher by almost 50% in the last 12 months. However, valuations remain attractive, and fresh exposure can be considered.
As an overview, Leonardo DRS provides defense electronics and technology, including advanced sensing, network computing and force protection. As of Q1 2024, Leonardo reported an order backlog of $7.8 billion, which was higher by 84% year over year. Given the industry tailwinds, I expect the order intake to remain robust, translating into accelerated growth.
In the last financial year, 10% of the company’s revenue was from international markets. A potential increase in international market orders is another catalyst for growth. Besides these factors, Leonardo has an innovation edge.
In May, the defense company was awarded a contract from Boeing Defense to provide a next-generation aerial refueling operator station for the KC-46 Pegasus tanker fleet. In April, Leonardo received the “Herschel Award for the development of a groundbreaking cooled infrared sensor.” Technological advances will ensure that Leonardo delivers healthy growth and value creation.
Howmet Aerospace (HWM)
Howmet Aerospace (NYSE:HWM) stock has been surging higher in the last few quarters. This is on the back of an improved results outlook. I would look at corrections to accumulate HWM stock for the long term.
It’s worth noting that Howmet has diversified operations. For Q1 2024the, the commercial aerospace segment accounted for 60% of the total revenue. The defense segment was only 15% of the total revenue but recorded 12% year-on-year growth2%.
In my view, defense segment growth is likely to remain robust compared to the growth of commercial transportation and industrial sectors. Therefore, defense segment revenue will increase as a percentage of total revenue. The company’s expertise in aluminum machining transform plates, forgings and extrusions, “fluid management systems and elaborate assemblies for radar and other defense structures” will likely support growth.
From a financial perspective, Howmet has guided for free cash flow of $800 million for 2024. Healthy cash flows provide headroom for aggressive investments in technology and potential dividend growth.
Leidos Holdings (LDOS)
Leidos Holdings (NYSE:LDOS) has surged 65% in the last 12 months. However, the defense stock looks attractively valued at a forward P/E of 16.7. LDOS stock also offers a dividend yield of 1%.
As an overview, Leidos Holdings provides the U.S. Department of Defense with s national security solutions and air, land, sea and space systems. For Q1 2024, Leidos reported year-on-year revenue growth of 7.,5% with the adjusted EBITDA margin at 12.3%. Considering the backlog and order intake, I expect revenue growth to accelerate.
Leidos ended Q1 with a backlog of $36.6 billion and net bookings at $3.7 billion. Recently, the company was awarded a $738 million U.S. Air Force contract for cybersecurity and IT support. In May, Leidos was awarded a $631 million sensor contract from the U.S. Army. As big orders continue to flow, LDOS stock will likely remain in an uptrend.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.