As the Q3 earnings season wraps, let’s dig into this quarter’s best and worst performers in the defense contractors industry, including Leidos (NYSE:LDOS) and its peers.
Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.
The 14 defense contractors stocks we track reported a strong Q3. As a group, revenues beat analysts’ consensus estimates by 2.2% while next quarter’s revenue guidance was 2.7% below.
While some defense contractors stocks have fared somewhat better than others, they have collectively declined. On average, share prices are down 2.3% since the latest earnings results.
Leidos (NYSE:LDOS)
Formed through the split of IT services company SAIC, Leidos (NYSE:LDOS) offers technology and engineering solutions such as military training systems for the defense, civil, and health markets.Leidos reported revenues of $4.19 billion, up 6.9% year on year. This print exceeded analysts’ expectations by 3%. Overall, it was a stunning quarter for the company with an impressive beat of analysts’ backlog and EPS estimates.
"Continued improvement in operating performance across all segments drove excellent revenue growth, record margins for net income and adjusted EBITDA, substantial earnings growth, strong cash flow, and robust bookings," said Leidos Chief Executive Officer Tom Bell.
Unsurprisingly, the stock is down 2.4% since reporting and currently trades at $165.65.
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Best Q3: Mercury Systems (NASDAQ:MRCY)
Founded in 1981, Mercury Systems (NASDAQ:MRCY) specializes in providing processing subsystems and components for primarily defense applications.Mercury Systems reported revenues of $204.4 million, up 13% year on year, outperforming analysts’ expectations by 12.5%. The business had an incredible quarter with an impressive beat of analysts’ organic revenue and EPS estimates.
Mercury Systems delivered the biggest analyst estimates beat among its peers. The market seems happy with the results as the stock is up 20.6% since reporting. It currently trades at $41.30.
Weakest Q3: Huntington Ingalls (NYSE:HII)
Building Nimitz-class aircraft carriers used in active service, Huntington Ingalls (NYSE:HII) develops marine vessels and their mission systems and maintenance services.Huntington Ingalls reported revenues of $2.75 billion, down 2.4% year on year, falling short of analysts’ expectations by 4%. It was a disappointing quarter as it posted a significant miss of analysts’ adjusted operating income estimates.
Huntington Ingalls delivered the weakest performance against analyst estimates and slowest revenue growth in the group. As expected, the stock is down 20.7% since the results and currently trades at $198.95.
Leonardo DRS (NASDAQ:DRS)
Developing submarine detection systems for the U.S. Navy, Leonardo DRS (NASDAQ:DRS) is a provider of defense systems, electronics, and military support services.Leonardo DRS reported revenues of $812 million, up 15.5% year on year. This print beat analysts’ expectations by 4.7%. Overall, it was an exceptional quarter as it also put up an impressive beat of analysts’ EPS and EBITDA estimates.
The stock is up 27.6% since reporting and currently trades at $36.25.
CACI (NYSE:CACI)
Founded to commercialize SIMSCRIPT, CACI International (NYSE:CACI) offers defense, intelligence, and IT solutions to support national security and government transformation efforts.CACI reported revenues of $2.06 billion, up 11.2% year on year. This number beat analysts’ expectations by 7%. It was an exceptional quarter as it also recorded a solid beat of analysts’ backlog and EBITDA estimates.
The stock is down 13.4% since reporting and currently trades at $454.01.
Market Update
Thanks to the Fed's series of rate hikes in 2022 and 2023, inflation has cooled significantly from its post-pandemic highs, drawing closer to the 2% goal. This disinflation has occurred without severely impacting economic growth, suggesting the success of a soft landing. The stock market has thrived in 2024, spurred by recent rate cuts (0.5% in September and 0.25% in November), and a notable surge followed Donald Trump’s presidential election win in November, propelling indices to historic highs. Nonetheless, the outlook for 2025 remains clouded by potential trade policy changes and corporate tax discussions, which could impact business confidence and growth. The path forward holds both optimism and caution as new policies take shape.Want to invest in winners with rock-solid fundamentals? Check out our and add them to your watchlist. These companies are poised for growth regardless of the political or macroeconomic climate.
This content was originally published on Stock Story
