Exploring Three Aerospace and Defense Stocks
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three aerospace and defense stocks. With spending in the industry projected to rise in response to an increase in commercial and military demand, should you consider the three aerospace and defense stocks of CAE Inc. (CAE), Embraer S.A. (ERJ) and V2X Inc. (VVX)?
Aerospace and Defense Stocks Recent News
Defense companies have been in the spotlight recently, as the world deals with geopolitical developments, strategic policy shifts and ongoing conflicts. Many nations are looking to modernize their military systems through investments in new technologies, artificial intelligence (AI) and autonomous systems. These goals are causing countries to increase their defense spending, thereby increasing growth and innovation in the industry.
On the civilian side, expansion in the global economy and growth of the middle class has resulted in a greater demand for air travel, driving an increase in commercial aviation and a rise in orders for new aircraft.
Taking these developments into consideration, projections indicate an industry compound annual growth rate (CAGR) of 8.2% for the period of 2023 through 2030.
Grading Aerospace and Defense Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades. They evaluate companies across five fundamental factors that have been shown to produce market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three aerospace and defense stocks — CAE Inc., Embraer and V2X — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Aerospace and Defense Stocks
What the A+ Stock Grades Reveal
CAE Inc. (CAE), together with its subsidiaries, provides simulation training and critical operations support solutions in Canada, the U.S., the U.K., Europe, Asia, Oceania, Africa and rest of the Americas. It operates through two segments: civil aviation, and defense and security. The civil aviation segment offers training solutions for flight, cabin, maintenance and ground personnel in commercial, business and helicopter aviation; a range of flight simulation training devices; and aircraft flight operations solutions. The defense and security segment operates as a training and simulation provider that delivers platform-independent solutions to enable and enhance force readiness and security for defense forces, original equipment manufacturers (OEMs), government agencies and public safety organizations. CAE Inc. was incorporated in 1947 and is headquartered in Saint-Laurent, Canada.
CAE Inc. has a Growth Grade of A, which is very strong. The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and long-term annualized basis and its ability to consistently generate positive cash from its core operations. The company has a five-year annualized sales growth rate of 5.1% and has generated positive annual cash from operations in the past five consecutive years.
CAE Inc. has a Momentum Grade of B, based on its Momentum Score of 70. This means that the stock’s momentum is strong in terms of its weighted relative price strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weight of 20%. The quarterly ranks are 58, 90, 42 and 43, sequentially from the most recent quarter, with higher ranks signaling stronger price momentum. The weighted four-quarter relative price strength is 3.9%.
CAE Inc. has a Quality Grade of C, based on a score of 59, which is average. Higher-quality stocks possess traits associated with upside potential and reduced downside risk. The Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. To be assigned a Quality Score, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
CAE Inc. ranks strongly in terms of its buyback yield and return on invested capital. Its buyback yield is 8.0% and its return on invested capital is 19.1%.
Embraer S.A. (ERJ) is a Brazil-based jet manufacturer. The company makes products such as aircraft for commercial and executive aviation, defense and security purposes, and related services. The company’s segments include commercial, executive jet, defense and security, and other. The commercial segment covers its aviation business and involves the development, production and sale of commercial aircraft and the rendering of support services. The executive jet segment markets to companies with fractional ownership, charters, air-taxi companies, high-net-worth individuals and flights academies. The defense and security segment conceives, designs, develops and manufactures a range of solutions for the defense and security market. The other segment provides fuel systems, structural parts and mechanical and hydraulic systems to Sikorsky Aircraft for its production of helicopters.
Embraer has a Value Grade of B, based on its Value Score of 62 which is good value. Higher scores indicate a more attractive stock for value investors and, thus, a better grade. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA).
The company has a shareholder yield of 21.5%, ranking in the 2nd percentile among all U.S.-listed stocks. Its price-to-free-cash-flow ratio is 7.6, ranking in the 18th percentile. Its enterprise-value-to-EBITDA ratio is 11.7, ranking in the 47th percentile.
Embraer has a Momentum Grade of A, based on its Momentum Score of 93. This means that the stock’s momentum is very strong in terms of its weighted relative price strength over the last four quarters. The quarterly ranks are 93, 62, 91 and 67, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 18.7%.
Embraer has a Quality Grade of B, based on its score of 66, which is strong. The company ranks strongly in terms of its buyback yield and F-Score. Its buyback yield is 21.5% and its F-Score is 8. The F-Score is a number between 0 and 9 that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company.
V2X Inc. (VVX) provides critical mission solutions and support services to defense customers worldwide. It offers a suite of integrated solutions across the operations and logistics, aerospace, training, and technology markets to national security, defense, civilian and international clients. The company was incorporated in 2014 and is headquartered in Reston, Virginia. V2X is a subsidiary of Vertex Aerospace Holdco LLC.
V2X has a Value Grade of C, based on a score of 58, which is average. The company’s price-to-sales and price-to-free-cash-flow ratios rank in the cheapest 15th and 14th percentiles, respectively. Its price-to-sales ratio is 0.35, and its price-to-free-cash-flow ratio is 6.3.
V2X has a Growth Grade of B, which is strong. Its five-year annualized sales growth of 25.6% is above the sector median of 5.6%. The company has generated positive annual cash from operations in the past five consecutive years.
Earnings estimate revisions indicate whether analysts’ expectations for the firm’s profits have improved or worsened. V2X has an Earnings Estimate Revisions Grade of B, based on a score of 76, which is positive. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the increases in its consensus earnings estimate for the current fiscal year over the past month and past three months.
V2X reported fourth-quarter 2024 earnings of $1.33 per share, 16.5% above the consensus estimate of $1.141 per share. In the third quarter of 2024, it reported a positive earnings surprise of 22.9%. Over the last month, the consensus earnings estimate for full-year 2025 has risen from $4.669 to $4.726 per share, based on three upward and three downward revisions.
