Three defense and aerospace stocks to buy offer niche opportunities that give investors a chance to acquire shares of under-the-radar companies.
The three defense and aerospace stocks to buy serve narrow but important roles in helping to defend freedom amid Russia’s ongoing invasion of Ukraine that began in February 2022, the war in the Middle East started when Hamas militants attacked and murdered civilians in Israel on Oct. 7 and other military conflicts. With the S&P 500 reaching all-time highs, these three defense and aerospace stocks have stayed modestly priced to be viewed worth purchasing by respected analysts.
The first of the three defense and aerospace stocks to buy is one that went bankrupt early in its existence due to extraordinarily high costs, cumbersome user equipment and regulatory delays that left it stuck at the start line as mobile phone services surged. However, financial restructuring became a lifeline for tapping the company’s potential without the albatross of insurmountable start-up expenses, charges of up to $7 a minute for voice service and a Super Bowl television advertisement that bombed when a deluge of viewers interested in the service called to subscribe but only a fraction of the queries could be answered.
Three Defense and Aerospace Stocks to Buy: Iridium
Iridium Communications (NASDAQ: IRDM), of McLean, Virginia, is a satellite services operator for the U.S. Department of Defense (DoD) and others that operates a system of 66 spacecraft in low-earth orbit (LEO) at a height of approximately 485 miles, or 780 kilometers. The initial version of the company initiated service on November 1, 1998, as Iridium SSC, then later exited bankruptcy and ultimately launched a replacement constellation called Iridium NEXT, while saving money in putting its satellites in orbit with the advent of reusable rockets from providers such as SpaceX.
Investors who like to buy stocks at bargain prices might take an interest in Iridium, since its shares incurred heavy selling after Qualcomm Inc. (NASDAQ: QUAL), a wireless products company headquartered in San Diego, California, ended a fledgling partnership between the pair launched in December 2022. Both pricing of the product and the technology likely factored into the break-up, wrote Louie DiPalma, a technology analyst with Chicago-based investment firm William Blair, who has an “outperform” rating on Iridium.
Chart courtesy of www.stockcharts.com.
“Qualcomm conveyed to us that even though the Iridium service was functional and available for smartphone manufacturers to incorporate in their phones, the smartphone manufacturers did not have a line of sight on the monetization models,” DiPalma wrote in a recent research note. “This implies that smartphone manufacturers were concerned about the economics and were objecting to the price Qualcomm was charging. Secondly, Qualcomm told CNBC in a statement that smartphone manufacturers preferred a standards-based satellite solution instead of Iridium’s proprietary solution. Others in the industry are developing standards-based satellite connectivity solutions for smartphones.”
Iridium executives indicated at a meeting with industry analysts that it is exploring the addition of 5G standards-based connectivity to its satellite network, DiPalma wrote. The handoff between cellular and satellite connectivity is simpler using 5G standards, he added.
Three Defense and Aerospace Stocks to Buy: Life After Qualcomm
While the Qualcomm partnership could have given Iridium significant growth potential, the satellite company still has 500 other distributor partners that include Garmin (NYSE: GRMN), General Dynamics (NYSE: GD), Boeing (NYSE: BA), Honeywell (NASDAQ: HON), Collins Aerospace, Caterpillar (NYSE: CAT) and the DoD. Those partners have put Iridium’s free cash flow (FCF) — the money left after paying operating and capital expenses (capex) — on pace to reach $2.32 per share this year, up from $1.46 per share in 2020, DiPalma added.
“FCF is set for another strong year in 2024 with capex coming down,” DiPalma said. “Iridium also may pursue other partnerships in the smartphone ecosystem,” he added.
Although the smartphone catalyst of the Qualcomm partnership has been removed, Iridium remains a steady free cash flow (FCF) generator, DiPalma wrote. Even though the dissolution of the joint effort occurred, Qualcomm and Iridium spent considerable time co-developing the service. But it became apparent in October 2023 that Iridium was not going to be integrated into Samsung’s marquee Galaxy S24 phone that is set to launch in January.
“The stock was hit hard, due to the fall through of a deal with Qualcomm,” said Michelle Connell, president of Dallas-based Portia Capital Management LLC. “I think its tech is sound. The CEO must feel the same; he bought about $1 million in shares after the Qualcomm announcement.”
Michelle Connell heads Portia Capital Management LLC.
Plus, Cathie Wood, chief executive officer of Ark Investment Management LLC, of St. Petersburg, Florida, recently ranked Iridium as one of her favorite stocks. Wood is known for focusing on technology stocks that have strong potential.
Paul Dykewicz interviews Cathie Wood.
Bryan Perry, who heads the Cash Machine investment newsletter and the Micro-Cap Stock Trader advisory service, recommends an Iridium rival that has jumped 30.77% since he advised buying it two months ago. Perry is averaging a dividend yield of 11.14% in his Cash Machine newsletter but is breaking out with his Iridium rival recommendation in his Micro-Cap Stock Trader advisory service.
Bryan Perry heads Cash Machine, averaging an 11.14% dividend yield.
However, Connell prefers Iridium between the two stocks, especially since its share price is rising again after dropping in the aftermath of the partnership breakup with Qualcomm. It is far better to buy after bad news than before it.
Three Defense and Aerospace Stocks to Buy: Iridium’s Guidance
Iridium’s Chief Financial Officer Ken Levy offered the following guidance that backs up the favorable outlook about the company by DiPalma and Connell.
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- Iridium unveiled its long-term growth outlook in September (at its Investor Day) — guidance called for $1 billion in Service Revenue by 2030 and the capacity to return $3 billion in shareholder returns during this period (2023-2030).
- Iridium’s growth over the next seven years will be driven by more than a half-dozen factors, including IoT and Personal Satellite Communications, Satellite Voice Services, New Midband Functionality, Growth in Government Services and Direct-to-Smartphone… to name a few.
- The company also continues to win new U.S. government contracts. In April 2022, it was awarded a seven-year pact with the Space Development Agency (as a subcontractor for General Dynamics) to drive its Engineering & Support revenues to a record level in 2023.
- Iridium was also awarded a five-year contract by the U.S. Space Force for Iridium Certus services as part of a U.S. Proliferated Low Earth Orbit (PLEO) Satellite-Based Services award.
Three Defense and Aerospace Stocks to Buy: Motorola
Another military and government technology stock that DiPalma gives an “outperform” rating is Chicago-based Motorola Solutions Inc. (NYSE: MSI). Motorola announced on Dec. 18 that it is buying IPVideo, the creator of the HALO Smart Sensor, for an undisclosed price. The acquisition complements Motorola’s physical security offerings by adding a non-video detection product to the company’s capabilities.
In the past five years, Motorola has made 13 acquisitions in the video and access control space. The HALO Smart Sensor product has multifunctional capabilities such as vape detection and air quality monitoring, gunshot detection, abnormal noise detection and more, DiPalma continued.
“Because the sensor does not possess a video function, it can be placed in areas such as restrooms, classrooms, hotel rooms and hospital rooms,” DiPalma wrote. “The HALO product also possesses other functions such as the HALO Cloud, which provides an online dashboard for monitoring and tracking, integration with third-party systems and real-time notifications to mobile devices via SMS and/or email.”
In addition, Motorola has an integrated bundle for the education market branded as Orchestrate that includes video systems, radio connectivity, RAVE panic button alerts and workflow software. HALO is a natural fit into Orchestrate, making Motorola’s education offering even stronger.
Three Defense and Aerospace Stocks to Buy: Valuation Matters
Motorola trades at 25 times the forward-year (2024) earnings per share (EPS) estimate, which is a premium to its 21 times February 2020 pre-pandemic multiple and a slight discount to its November 2021 peak multiple of 27 times, DiPalma assessed. Record demand for public safety communications, video security and command center software should drive long-term EPS growth in the low double-digit percentages when taking into account organic growth, acquisitions and stock buybacks, he added.
The annual stock return should at least match EPS growth, DiPalma said. He opined that the primary risk to Motorola shares is valuation multiple compression from if revenue growth slows.
Chart courtesy of www.stockcharts.com
Three Defense and Aerospace Stocks to Buy: RBC Bearings
RBC Bearings Inc. (NYSE: RBC), an international manufacturer and marketer of highly engineered precision bearings and products used in machines, aircraft and mechanical systems, recently gained an upgrade from “underperform” to a “buy” recommendation of BofA Global Research. RBC Bearings manufactures products in all major categories, it focuses primarily on highly technical or regulated bearings and engineered products for specialized markets that require sophisticated design, testing and manufacturing capabilities.
“We continue to see RBC’s defense exposure as having a particularly strong set-up heading into CY24,” wrote Ron Epstein, a defense research analyst with BofA. “Defense sales increased 25% Y/Y in the quarter, driven by growth in marine end-markets and strong demand in helicopters, jets, space and missiles.”
RBC continues to execute on its marine growth strategy by increasing content on Virginia and Columbia class submarines. Marine revenues rose double-digit percentages and are expected to maintain high growth levels for the next 12 months, Epstein added.
“We expect RBC’s defense segments to further benefit from increased demand,” Epstein wrote in a recent research note. “The company could also see some gains from an additional $6 billion of submarine industrial base supplemental funding,”
Profit margin expansion in projected in both A&D (Aerospace & Defense) and industrials as highly profitable volumes ramp up, Epstein forecast. Ahead of the company’s October 2024 mandatory preferred stock conversion, management highlighted that the move would dilute EPS by about 5%, net of the dividend payout.
“This is about half of the impact we previously estimated,” Epstein wrote. “Thus, we increase our 2024-2026 estimates and our price objective to $280 from $230.”
Chart courtesy of www.stockcharts.com
Military Needs Soar amid Wars
The U.S. military must adopt innovation, speed up implementation of technological advances, tap the talents of people in various industries and increasingly collaborate with private industry and international partners to maximize its effectiveness, the U.S. Joint Chiefs of Staff Gen. Charles Q. Brown Jr. told attendees of a recent national security conference. The raging wars in Ukraine and the Middle East are prime examples of the need.
The surprise Oct. 7 military attack by Hamas on Israel that started an ongoing war in the Middle East and Russia’s February 2022 invasion of neighboring Ukraine show how suddenly peace can be broken by aggressors, requiring rapid and effective response.
“The Department of Defense is doing more than ever before to deter, defend, and, if necessary, defeat aggression,” Gen. Brown said on Nov. 16 at the Johns Hopkins University conference.
Chairman Joint Chiefs of Staff Gen. Charles Q. Brown, Jr.
Photo By: Benjamin Applebaum
The security landscape can change in an instant, Gen. Brown said he quickly learned since taking his post on Oct. 1.
“We may not have much warning when the next fight begins,” Gen. Brown said. “We need to be ready.”
