The Top Stocks to Invest in Canadian Defence Contractors

Top Canadian defence stocks like CAE (TSX:CAE) are well worth snatching up as Canada gets more involved in the Russia-Ukraine conflict.

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Russia’s invasion of Ukraine in February 2022 stunned world opinion and spurred Canada and its NATO allies into action. Since then, the European Union and NATO coalition has pledged billions to the defence of Ukraine. The two sides remain locked in a bitter war of attrition, and a victory for either side appears as remote as it has been since the beginning of the conflict.

The Business Research Company recently valued the global defence market at $577 billion in 2023. It projects that this sector will deliver a compound annual growth rate (CAGR) of 5.6% from 2023 through to 2027.

Canadians should look to invest in the defence sector in this environment. Today, I want to look at top Canadian defence contractors that are worth snatching up before the 2023 summer season.

This rising stock offers exposure to the Canadian defence sector

Magellan Aerospace (TSX:MAL) is a Toronto-based company that engineers and manufactures aeroengine and aerostructure components for aerospace markets in Canada, the United States, and Europe. Shares of this defence stock have climbed 7.9% month over month as of mid-morning trading on June 12. The stock is still down 8.1% so far in 2023.

This company released its first-quarter (Q1) fiscal 2023 earnings on May 4. Revenues increased 19% year over year to $223 million. Meanwhile, gross profit soared 104% from the previous year to $22.2 million. Moreover, it posted adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $18.5 million — up 61% compared to the previous year.

Shares of this defence stock are trading in very favourable value territory compared to its industry peers. Meanwhile, Magellan offers a quarterly dividend of $0.025 per share. That represents a modest 1.2% yield.

Here’s why CAE is my favourite Canadian defence stock right now

CAE (TSX:CAE) is a Montreal-based company that provides simulation training and critical operations support solutions in Canada, the United States, the United Kingdom, Europe, and worldwide. Its shares have dipped 5% over the past month at the time of this writing. The stock is still up 4% in the year-to-date period.

In Q4 fiscal 2023, CAE delivered revenue growth of 32% to $1.25 billion. Meanwhile, it posted adjusted earnings per share (EPS) of $0.35 compared to $0.29 in the previous year. For the full year, the company achieved revenue growth of 25% to $4.2 billion. Moreover, adjusted earnings per share (EPS) rose to $0.88 compared to $0.84 in fiscal 2022. Defence revenue rose 14% year over year to $536 million in Q4 FY2023, while annual defense revenue jumped 15% to $1.84 billion.

This defence stock is on track for strong earnings growth going forward. I’m looking to snatch up CAE in the late spring season of 2023.

One more top stock to target in this exciting space

Heroux-Devtek (TSX:HRX) is the third and final defence stock I’d look to snatch up this month. This Quebec-based company is engaged in the design, development, manufacture, finishing, assembling, and repair and overhaul of aircraft landing gears, hydraulic and electromechanical flight control actuators, and other components. Its shares have jumped 11% over the past month. That has thrust the stock into the black in the year-to-date period.

In fiscal 2023, Heroux-Devtek reported total sales of $543 million — up from $536 million in the prior year. Its funded backlog rose to $864 million compared to $682 million in fiscal 2022. Defence sales were stable at $107 million in Q4. Moreover, defence sales totaled $372 million for the full year.

This defence stock is trading in favourable value territory compared to its industry peers. Meanwhile, its earnings are geared up for strong growth going forward.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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