While markets and investors are often captivated by sectors promising rapid growth and technological advancements, there are times when strategic investments in more stable sectors can offer “defence” against economic downturns. ​

One such sector is Defence, where substantial government spending provides a consistent revenue stream. The United States continues to allocate enormous sums to defence, and recently, the Australian government has also flagged the need for significant investment in its forces and capabilities over the coming decade.
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This sector not only includes established giants with sustainable business models but also hidden gems that can surge by supplying innovative solutions.

The defence sector is uniquely positioned to provide stability and growth, even during economic downturns. Government spending on defence remains robust, driven by the need to maintain national security and technological superiority. This creates a reliable revenue stream for companies operating within this sector. Additionally, long-term contracts and government budgets often insulate Defense companies from the economic volatility that affects other sectors.

​RTX Corporation

RTX Corporation (NYSE: RTX) (formerly known as Raytheon Technologies Corp.) is a leading aerospace and defence company that provides advanced systems and services for commercial, military, and government customers worldwide. The company operates through four principal business segments: Collins Aerospace Systems, Pratt & Whitney, Raytheon Intelligence & Space, and Raytheon Missiles & Defense.

The company delivered an impressive Q1 2024 earnings report, with sales of $19 billion, a 12% increase from Q1 2023, and earnings growth of 32% year-over-year.

RTX’s defence contractor division, Raytheon, reported significant classified bookings, as well as $1.2 billion worth of Patriot anti-air defence systems and $282 million of National Advanced Surface-to-Air Missile Systems delivered to Ukraine. RTX’s civilian divisions, Collins Aerospace and Pratt & Whitney, also outperformed, with Collins Aerospace experiencing a 9% sales increase and Pratt & Whitney reporting a 23% year-over-year sales growth. The company’s 2024 financial guidance anticipates a total sales growth of 14% and potential earnings of over $5.25 per share. The recent strong performance is reflected in the share price with a 13% return over the past three months. As a fundamentally defensive play in the current market environment, RTX offers exposure to growing defence spending in Europe and a strong commercial aerospace business.

The company’s diversified portfolio ensures a stable revenue stream across multiple defence and aerospace domains.

Leidos Holdings, Inc.

Leidos Holdings, Inc. (NYSE: LDOS) is a leading provider of information technology, engineering, and science solutions to the U.S. government, state and local agencies, and commercial markets. The company operates through four segments.

Leidos reported a strong result for the first quarter of fiscal 2024.

Revenues increased 7% year-over-year to US $4.0 billion, driven by strong program execution and strategic acquisitions. Net income grew to $283 million or $2.07 per diluted share, up from $164 million Q1 2023. Adjusted earnings per share climbed 56% to $2.29, while the adjusted operating earnings margin expanded to 12.3% from 9.4% a year ago. The company generated an operating cash flow of $63 million and non-GAAP free cash flow of $46 million. With a solid backlog and book-to-bill ratio, Leidos is well-positioned to capitalise on growing defence and government spending.

The company was recently awarded a US $738 million contract by the U.S. Air Force to provide enterprise IT and telecommunications support, including cybersecurity, to various Air Force and Space Force headquarters and activities in the national capital region.

The contract, which includes a one-year base period and multiple options extending up to five and a half years, will see Leidos deliver critical services such as cybersecurity, IT operations, and program management. Steve Hull, Leidos’ digital modernisation sector president, emphasised their commitment to advancing the Air Force mission with secure, resilient technology solutions, building on over five decades of continuous support.
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Leidos’ extensive expertise across various sectors positions it well to leverage government contracts and provide innovative solutions.

​DroneShield DroneShield Ltd (ASX: DRO) is a leading provider of counter-drone (C-UAS) and multi-mission unmanned systems (C-UxS) solutions.The company uses artificial intelligence and machine learning to deliver advanced technologies for military, government, and commercial organisations in over 70 countries. DroneShield’s product portfolio includes fixed-site, mobile, and handheld systems for detecting, tracking, and defeating drones. Their solutions integrate multiple sensors and effectors, offering a comprehensive layered defence against drone threats.

In the most recent quarterly report, DroneShield reported incredible financial results for the first quarter of 2024, with revenue growing 10 times year-over-year and a significant increase in order intake.

The company has also expanded its global footprint, securing major contracts with military and government agencies, particularly in the US. Over the past 12 months, DroneShield’s share price has rocketed, reflecting the growing demand for counter-drone solutions and the company’s successful execution of its strategic initiatives.

As the threat of drone-related incidents continues to rise, DroneShield is well-positioned to capitalise on the increasing need for effective counter-drone technologies.

Codan 

Codan Limited (ASX: CDA) is an international company founded in 1959 that develops rugged and reliable electronics solutions for government, corporate, non-government organisations (NGO) and consumer markets across the globe.
The company’s communications segment produces equipment used by military, law enforcement, humanitarian, and commercial organisations known for reliability and performance in harsh environments, making them ideal for defence applications. Codan’s focus on innovation and quality ensures it remains a trusted supplier in the defence communications market. The company’s technologies also include metal detection, and it has a global network of dealers, distributors and agents that allow it to deliver solutions worldwide.

The company delivered a strong H1 FY24 result, with group revenue up 26% to $265.9 million and net profit after tax increasing 24% to $38.1 million compared to the prior corresponding period. The Communications segment achieved 12.5% revenue growth, while Metal Detection revenues surged 49%. Despite higher expenses due to acquisitions and investments, Earnings Before Interest & Tax (EBIT) and Net Profit After Tax (NPAT)  grew 31% and 24% respectively. Net debt increased to $82.5 million after funding $30.3 million for the Eagle and Wave Central acquisitions. Looking ahead, Codan expects Communications revenue growth to exceed the top end of its 10-15% target range.

Codan’s focus on innovation and quality ensures that it remains a trusted supplier in the defence communications market.

The sector is driven by substantial government spending and innovative solutions catering to evolving defence needs providing market resilience. While some will initially look to increased expenditure as a result of ongoing conflict, a second-level thinking approach looks to the sector’s ability to adapt through technological advancements and market expansion, positioning companies at the forefront of research and development for significant growth.
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By recognising these dynamics, investors can uncover quality businesses with strong tailwinds poised to thrive in the coming decade.