3 Defence Stocks to Watch in the Artificial Intelligence (AI) Revolution

Bull cases are rising for three Canadian defence stocks that are at the forefront of the AI revolution.

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The artificial intelligence (AI) revolution is applicable not only to business operations and supply chains but also to other industries that need efficient systems and improved capabilities. In 2022, the U.S. Department of Defense said it would integrate AI technology into national security to help transform the character of war.

In the current global geopolitical tensions and military conflicts, bull cases for defence stocks are rising. Aerospace and defence companies benefit from higher government military spending. Canada’s proposed defence budget starting in 2024 and over five years is $8.1 billion.

From an investment perspective, CAE (TSX:CAE), Héroux-Devtek (TSX:HRX), and Magellan Aerospace (TSX:MAL) are the defence stocks with growth potential due to the ongoing AI revolution.

Multi-domain training solutions    

CAE aims to bring the digital and physical worlds together for a safer world. This $9.1 billion high-technology company serves customers in the civil aviation, defence, and security sectors. Its Defense & Security business segment provides digitally immersive training and operational support solutions for multi-domain operations (land, air, maritime, space, and cyber).

The company trains and prepares customers for multi-domain operations and uses AI, digital technologies, and cloud computing to achieve and ensure readiness. More importantly, it provides the necessary operational support for a multi-domain environment.

CAE holds the leadership position in the air domain with its flight training and simulation solutions. Its current market cap is $1.9 billion, or 26.4% higher than in October 2023, and it has averaged $182.2 million net income in the last two years. If you invest today, the share price is $28.60. Market analysts’ high price target in one year is $40 (+39.9%).

Booming landing gear market

Héroux-Devtek designs, develops, and manufactures aerospace and defence products. The $651.2 million company is popular globally for its landing gear systems. Other product offerings include actuation systems, airframe structural components and hydraulic systems. Its customer base is from domestic and international military markets.

At $19.35 per share, year to date is 27.3%, while the trailing one-year price return is 49.19%. Heroux-Devtek’s thriving business is reflected in the stock’s performance. The competitive advantages are growing profitability, record firm order backlog, and a huge addressable market.

Moreover, the portfolio in both the defence and civil sectors is well-diversified. Because of technological advancements, Heroux-Devtek can compete in the booming landing gear market and meet customer demands.

Dark horse

Magellan Aerospace is an aerospace and defence contractor. The $450.45 million company serves the military and space markets and competes with Heroux-Devtek in the landing gear market. It provides aero-engine and aerostructure assemblies and components for aerospace clients and advanced products for military customers.

In the first quarter (Q1) of 2024 (three months ended March 31, 2024), revenues increased 5.3% to $235.2 million compared to Q1 2023, while net income jumped 63.5% year over year to $6.1 million. Management said Magellan continues to experience the overhanging impacts of the pandemic and military conflicts disrupting supply chains.

This tier-one supplier’s major customers include Boeing, BAE Systems, and Airbus. Magellan hopes to benefit from the U.S. Congress-approved US$43.6 billion budget for aircraft procurement. At $7.88 per share, MAL pays a modest 1.26% dividend.

Entrenched positions

CAE, Héroux-Devtek, and Magellan Aerospace are at the forefront of the AI revolution in the aerospace and defence industry. These TSX defence stocks are entrenched in their respective markets and deserve serious consideration from Canadian investors.

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 Christopher Liew 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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