Are you considering investing in defence stocks? Here’s everything you need to know before you dip your toe in the defence industry.
What are defence stocks?
Defence stocks are companies involved in the production and sale of aircraft, ships, spacecraft, weapon systems, and equipment for military purposes. An adjacent sector is the aerospace industry, which conducts many of the same activities but for civilian purposes.
Defence stocks fall under the umbrella of the industrial sector, comprised of companies involved in manufacturing, resource extraction, and construction. Thus, defence companies that manufacture and sell equipment/crafts are covered by this sector.
The defence industry primarily operates under long-term, exclusive contracts with government and military entities, both domestically and globally. Defence companies produce weaponry, but may also offer information technology (IT), cybersecurity, intelligence, data analytics, and robotic services.
This cyclical sector often experiences strong tailwinds during times of geopolitical instability and conflict due to increased demand and government budgets for their products and services. Recent examples include the Russian invasion of Ukraine, which sent defence stocks in the United States skyrocketing.
Investing in Canadian military stocks
Canadians looking to buy domestic defence stocks should begin their search in the industrials sector of the Toronto Stock Exchange. From there, it is important to determine if the company under consideration is a pure-play defence stock or hybrid.
A pure-play defence stock refers to a company that derives a substantial portion of its revenue from military-related contracts. A hybrid refers to a company that derives a smaller, non-core portion of its revenue from military-related contracts. This is important because many aerospace companies dabble in defence, but do not make it a core component of their business model, electing to focus more on civilian applications.
When considering Canadian defence stocks, many of the same fundamental analysis and valuations that apply to the industrials sector should be considered:
- Is the company’s balance sheet healthy? What is the current and long-term debt-to-equity ratio? Is shareholder equity negative?
- Has the company consistently grown quarterly revenues and earnings year over year? If so, at what rate?.
- Are the company’s gross and operating margins positive and ample?
- How does the company’s enterprise value-to-EBIDTA ratio compare to peers in its sector?
- What are the company’s price-to-book, price-to-sales, price-to-free-cash-flow, and price-to-earnings ratios, and how do these compare to peers in its sector?
- What do the company’s return on assets, return on equity, and return on invested capital ratios look like?
- Does the company’s revenues depend on a single large customer?
- How long-term and secure are the contracts that the company signs?
Top Canadian defence stocks
Here are some of the top military stocks in Canada based on market cap:
| Defence Company | Description |
| CAE (TSX:CAE) | CAE designs, manufactures, and supplies simulation equipment and training solutions to defence and security markets, commercial airlines, business aircraft operators, helicopter operators, aircraft manufacturers, and health care education and service providers worldwide. |
| Bombardier (TSX:BBD.B) | Bombardier engages in the manufacture and sale of business aircraft inEurope, North America, the Asia Pacific, and internationally, providing new aircraft, specialized aircraft solutions, pre-owned aircraft, and aftermarket services. |
| MDA (TSX:MDA) | MDA designs, manufactures, and services space robotics, satellite systems and components, and geointelligence surveillance systems in Canada, the United States, Europe, Asia, the Middle East, and internationally. |
CAE
CAE is one of Canada’s largest defence contractors and a global leader in simulation technology and training solutions, serving the civil aviation, defence and security, and healthcare sectors. Founded in 1947 and employing roughly 13,000 people, the company provides flight simulators, pilot and crew training, mission support services, and medical simulation systems across more than 40 countries.
In its first quarter of fiscal 2026, CAE reported $1.1 billion in revenue, with operating income up year over year and a 12.2% profit margin. The company’s backlog reached $19.5 billion, underscoring strong demand across both its civil and defence segments. Although free cash flow turned negative during the quarter, management attributed it to temporary working capital timing, not operational weakness.
CAE trades at a premium valuation, around 30 times earnings and 2.6 times sales, reflecting investor confidence in its high-quality earnings base and recurring revenue streams. Its exposure to rising global defence budgets and the ongoing recovery in commercial aviation provides dual growth drivers.
With stable margins, robust contracts, and a growing order book, CAE remains a defensive long-term holding for investors seeking reliable exposure to the aerospace and defence industries.
Bombardier Inc.
Bombardier Inc. (TSX: BBD.B) is a leading Canadian manufacturer of business and specialized aircraft, employing more than 18,000 people worldwide. Founded in 1902, the company serves both private and government clients across North America, Europe, and Asia-Pacific, offering new and pre-owned jets, specialized aircraft solutions, and comprehensive aftermarket services including parts, maintenance, and training.
After refocusing exclusively on its business jet operations, Bombardier has evolved into a leaner, more profitable company. Its flagship Global 8000, set to enter service in late 2025, is expected to be the fastest and longest-range business jet in the world, capable of flying at Mach 0.94 over 8,000 nautical miles.
The company has also expanded its defence and services footprint, securing a recent US$1.7 billion aircraft and service order with options for 70 more deliveries beginning in 2027. These contracts, along with robust aftermarket demand, contribute to a growing multi-year revenue pipeline.
Financially, Bombardier has made steady progress in strengthening its balance sheet, including the US$300 million partial redemption of its 7.875% senior notes due 2027 as part of its ongoing debt reduction strategy. The company also recently completed a 25-to-1 reverse split of its common shares, aligning its capital structure with its long-term growth ambitions.
Shares have surged 10 fold over the past three years, underscoring renewed investor confidence following its strategic refocus on business jets and expanding defence footprint. While the stock offers no dividend and much of the near-term growth may already be reflected in its valuation, Bombardier remains a notable watchlist candidate for investors seeking exposure to the business aviation and defence sectors.
MDA
MDA designs and builds advanced satellite systems, robotics, and geointelligence solutions for governments and commercial clients worldwide. Founded in 1969, the company has grown to more than 3,000 employees and plays a leading role in Canada’s rapidly expanding space economy.
Despite recent volatility — including a roughly 50% drop in its share price over the past three months — MDA’s fundamentals remain solid. The pullback followed news that EchoStar cancelled a major satellite deal and that Globalstar, one of MDA’s largest clients, may be in early talks to sell to SpaceX, sparking concerns over the future of MDA’s $1.1 billion digital satellite contract.
MDA is also involved in telecommunications services for government agencies, prime contractors, and space companies via its space-based broadband from a low-orbit network of satellites. Recently, the company was awarded a contract from Lockheed Martin to build antennas and electronics for 42 low earth orbit satellites.
Are Canadian defence stocks right for you?
Investing in the defence sector is a high-risk, high-reward endeavour. Most Canadian defence stocks do not have the best balance sheets, often exhibiting high amounts of debt, operating losses, high capital expenditures (CAPEX), and low or negative earnings. This can lead to high volatility in their share prices.
Furthermore, much like the broader industrial sector, defence stocks are considered cyclical stocks, outperforming in some economic conditions and underperforming in others. During periods of economic growth and falling interest rates, defence stocks often benefit from higher spending. When inflation and rising interest rates strike, their margins and valuation can drop sharply as end users cut spending.
Declines in government budgets for defence will also significantly affect their earnings, as government contracts can comprise a large portion of their revenues. Some defence companies can be dependent on a single or few critical contracts. The loss of one of these at the end of a period to a successful competitor bid can be devastating.
However, with high volatility and risk comes strong growth and potential for high returns. Investors who buy into a defence stock with solid fundamentals during a period of under-valuation could reap significant returns once the industry takes off.
And for investors who want downside price protection against geopolitical tensions or war, they can use defence stocks as a hedge due to their tendency to outperform when conflicts arise.