Canadian defence stocks are due for a boost. Earlier this spring, the Canadian government announced it would increase defence spending to 5% of gross domestic product (GDP).
3.5% of that spending is to be allocated to core military, and 1.5% will be allocated to military infrastructure. This is a substantial increase from years past.
For many years, the Canadian government did not hit the North Atlantic Treaty Organization’s (NATO) minimum spend target of 2% of GDP. This change will be very beneficial for several key Canadian defence stocks. Here are three set to win from this shift.
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Calian Group: A top Canadian defence stock
Calian Group (TSX: CGY) is one of the best defence stocks in Canada. Over 50% of its revenues are from defence activities focused on military training, primary health service to the military, and communications technologies.
It’s a major provider to the Canadian military. If any company is to benefit from an increase in defence spending, Calian is likely to be it.
Calian has had some issues with consistency over the past couple of years. It has revised guidance several years in a row. That is largely due to a decline in its IT and cybersecurity business since the pandemic.
However, the company has a target to hit $1 billion in revenues and $125 million in adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) by the end of 2026. It’s an ambitious plan, but the increase in defence spending could really help it hit that. If it does, the stock would be very cheap today at less than 10 times earnings.
MDA Space: A new frontier of defence
MDA Space (TSX: MDA) is another stock that is already benefiting from a rise in Canadian defence spending. In fact, it just announced a +$50 million contract with the Canadian Navy to develop unmanned aircraft.
MDA is a leading global developer of satellite constellations, space robotics, and components. It also has a growing geointelligence business. Space is not just the final frontier. It might be the next major battleground.
Satellites have become a crucial component in communication, data transmission, and monitoring. With space around the earth becoming ever more crowded, there is more and more room for conflict. MDA has the intellectual and manufacturing capacity to help countries and companies fortify their satellite portfolios.
The company has a massive backlog that could fuel several years of double-digit growth. While the business can be lumpy at times, it’s an attractive bet for defence exposure in Canada.
Stantec: A top infrastructure stock
Stantec (TSX: STN) is a secondary way to play the future defence spending boom in Canada. While Stantec is a diversified global engineering and design firm, it is an important supplier to the Federal government.
Currently, it has contracts to expand facilities for Canadian fighter jet squadrons in Alberta and Quebec. It is also building out a significant facility for Canada’s maritime helicopter squadron in British Columbia.
Stantec has a $7.9 billion backlog that has been supporting very solid organic growth. The company has been executing very well in the past few years. Its stock is up 240% in the past five years.
1.5% of the new defence spending can be infrastructure-related. Stantec has close connections to the Canadian and U.S. governments, which means it will get to win its fair share of these infrastructure projects. The new defence budget could provide another nice boost to Stantec’s organic growth both in the near and long term.
