Last week, Iranian general Qassem Soleimani was killed in a United States drone strike in Baghdad, Iraq. It is impossible to predict the consequences that this move will have on the region. Iran has vowed to respond.
The 2010s saw the eruption of several bloody conflicts in the region, including the Syrian Civil War, Iraqi Civil War, Yemeni Civil War, and Libyan Civil War. Altogether, these conflicts have claimed the lives of hundreds of thousands. Unfortunately, this start to the 2020s seems to indicate that fighting will only intensify in the region.
In the spring of 2019, I’d discussed the rise in global military spending. The Munich Security Report 2019, which was released early last year, made disturbing predictions for the years ahead.
Wolfgang Ischinger, head of the Munich Security Conference, writes, “A new era of great power competition is unfolding between the United States, China, and Russia, accompanied by a certain leadership vacuum in what has become known as the liberal international order.”
Investors need to prepare for this new reality. Today, I want to look at two stocks in the defence sector. These companies have seen increased activity over the past decade, and this is likely to continue, as nations around the world spend more on defence.
CAE (TSX:CAE)(NYSE:CAE) is a Montreal-based manufacturer of simulation technologies, modelling technologies, and training services that cater to several customers, include those in the defence sector. Shares have achieved average annual returns of 15% over the past 10 years as of close on January 3. The stock has climbed 7% over the last three months.
The company released its second-quarter fiscal 2020 results on November 13. Total revenue rose 21% year over year to $896.8 million, and earnings per share increased to $0.28 over $0.23 in the prior year. Defence revenue in the second quarter climbed 5% year over year to $336.5 million. Its income growth profile is more heavily weighted in the back half of the year, which means bigger things should be ahead in this segment in the final two quarters of FY 2020.
CAE last paid out a quarterly dividend of $0.11 per share, which represents a modest 1.2% yield.
Heroux Devtek (TSX:HRX) is a Quebec-based company that specializes in the manufacturing and repair of various industrial components. Its stock has achieved average annual returns of 17% over the past decade. Shares have climbed 20% over the past three months.
It also released its second-quarter fiscal 2020 results in November. Sales jumped 52.1% from the prior year to $145.5 million, and operating income soared 98.9% to $10.5 million. Adjusted EBITDA increased 63.3% to $21.5 million. Its funded backlog rose to a record level of $769 million.
The company’s defence sales outperformed a strong first quarter. Defence sales rose 65.7% year over year to $80.6 million. In the year-to-date period, defence sales have climbed 76.6% from the first six months of fiscal 2019 to $156.6 million. This segment powered the company’s sales in the first half of this fiscal year.
Heroux-Devtek is trading close to a 52-week high. It possess a price-to-earnings ratio of 22 and a price-to-book value of 1.8 at the time of this writing, putting it on solid footing value-wise compared to industry peers.
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Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.
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