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 Innovative Solutions and Support, Inc. (NASDAQ:ISSC) 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 engineer in a meeting room, strategizing the future of the company’s utility management system.
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.
Overall ISSC ranks 1st on our list of most undervalued defense stocks to buy according to analysts. While we acknowledge the potential of ISSC 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 ISSC 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.