We recently compiled a list of the 10 Undervalued Aerospace Stocks To Buy According to Analysts. In this article, we are going to take a look at where V2X, Inc. (NYSE:VVX) stands against the other undervalued aerospace stocks.
The International Aerospace and Defense industry
The aerospace and defense industry is a fast-growing industry, mainly because of the increased global travel after the pandemic and increased geopolitical tensions, which has led to increased government spending on defense. According to Research and Markets, the global aerospace and defense industry was valued at $884 billion in 2023. The industry is expected to grow at a compound annual growth rate of 5.8% to reach $1.23 trillion by 2028. Growth in the sector pertains to the rise in military modernization and increased defense spending. Whereas, increased spending on air travel is contributing to the growth in the commercial aerospace industry.
Geopolitics and Increased Spending on Defense
The world has been in a straight of turmoil, with geopolitical tensions leading to wars. While war and geo-political tensions are a dealbreaker for many industries, for the aerospace and defense companies the story is different. One of the key drivers of revenue for such companies is government contracts for military-grade aircraft, weapons, and defense systems. Thereby, with increased risks of war, defense spending goes up and aerospace and defense companies land more contracts.
According to a report by CNBC on April 22, global military spending hit an all-time high in 2023 after a 7% ramp-up. The global military spending was at a record high of $2.4 trillion last year. One of the key drivers of increased defense spending has been the prolonged Russia-Ukraine conflict and the recent tensions between Israel and Palestine. During the previous year the United States, China, and Russia were noted to be the biggest military spenders.
According to the U.S. Department of Defense, the government has $2.09 trillion in budgetary resources and plans to spend $972.88 Billion during 2024, out of which $229.80 billion is designated for award obligations. This indicates increased business opportunities for aerospace and defense companies during the year.
Upcoming Trends in the Aerospace Industry
According to a survey conducted by McKinsey & Company, AI-powered advancements can reshape aircraft maintenance, repair, and overhaul, however, companies need to accept the digital transformation.
Aircraft fleet management is a challenging sector. In the US alone, airline companies have witnessed a 15% increase in maintenance costs during the past 5 years. Moreover, there has been a 14% increase in flight delays due to maintenance.
The maintenance, repair, and overhaul (MRO) can be optimized using AI-powered solutions that allow better performance and improve efficiency. For Instance, AI-powered MRO can predict proper maintenance needs for an aircraft and the labor, material, and time needed for the maintenance. However, to leverage the power of AI, maintenance companies would have to become comfortable with adapting to new technologies and deal with the status quo disruption. The survey by McKinsey & Company found that only 33% of their respondents believed digital adoption to be critically important in achieving organizational objectives. Whereas 70% believed it could become critically important in the next 3 to 5 years, indicating hesitation towards immediate adoption of AI-powered solutions in the MRO sector.
Our Methodology
To compile the list of 10 undervalued aerospace stocks to buy according to analysts we used the Finviz stock screener and iShares U.S. Aerospace & Defense ETF. We aggregated a list of stocks that operated in the aerospace and defense industry and filtered stocks that had a forward P/E ratio of less than 22 and a positive earnings growth rate. These stocks are cheaper than the market, which currently has a forward P/E of 22 (according to data from WSJ).
Once we had our filtered list, we ranked these stocks based on the average price target upside as per Wall Street analysts. The stocks are ranked in ascending order of the average price target upside as of August 15, 2024.
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V2X, Inc. (NYSE:VVX)
Average Price Target Upside as of August 15: 29.21%
Forward P/E as of August 15: 11.7
V2X, Inc. (NYSE:VVX) provides essential mission solutions and support services for government defense agencies around the world. It operates through four main business segments namely, Operations and Logistics, Aerospace, Training, and Technology. V2X, Inc. (NYSE:VVX) provides various base management services to the Air Education Training Command in the US. It also provides life cycle support for advanced aircraft such as the F/A 18 and V22 Osprey. The company serves national security agencies and commercial clients in the international market.
The second quarter of 2024 was a success for V2X, Inc. (NYSE:VVX). The company increased its revenue by 10% year-over-year to generate $1.07 billion during the quarter. It also landed awards worth more than $4 billion including a $265 million award to support NASA’s operations in preparation for human spaceflight missions, and a $747 million Adversarial Aircraft program to support the advancement of US Navy pilots. Moreover, the company will also be spearheading the next-generation readiness award valued at more than $3 billion.
In addition to a strong performance in the top line, the company was also able to generate an adjusted EBITDA of $72.3 million and an adjusted earnings per share of $0.83 during the quarter. The strong market demand for V2X, Inc. (NYSE:VVX) products and services can be gauged by its strong backlog of $12.2 billion representing approximately 3x revenue at the midpoint of guidance.
Management has also raised its full-year guidance with revenue at $4.175 billion to $4.275 billion (the previous range was $4.1 billion to $4.2 billion) and reaffirmed its adjusted EBITDA guidance of $300 million to $315 million. Lastly, V2X, Inc. (NYSE:VVX) has around $72 million in cash and cash equivalents, indicating significant room for short-term investments.
VVX is cheap at current levels. It is trading at 11.7 times its forward earnings, a 37% discount to its sector. Moreover, its earnings are also expected to grow from -$0.01 to $0.54 during the year. 6 analysts have a strong buy rating on the stock, with their median price target of $61 presenting an upside of 29.21% from current levels.
Overall VVX ranks 2nd on our list of the best undervalued aerospace stocks to buy. While we acknowledge the potential of VVX as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than VVX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.