As George Washington once said,

“to be prepared for war is one of the most effectual means of preserving peace.”

As geopolitical tensions rise across the globe, defense spending is on the rise. Dated systems are quickly showing their age, and the U.S. needs new tools and systems across defense and intelligence agencies to maintain the level of security to which we’ve gown accustom.

With strong customer relationships, proven expertise, and growing AI capabilities, this company is poised to profit from these trends. However, the stock is priced for a permanent decline in profits.

We think that view underestimates the durability of this company’s operations and its ability to generate strong free cash flow. The disconnect between the company’s fundamentals and its valuation provides Very Attractive Risk/Reward.

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This stock presents quality Risk/Reward based on the company’s:

  • sustained, durable demand across mission-critical federal programs and a multi-billion-dollar backlog,
  • strategic shift toward more complex, higher-value work that’s driving higher margins,
  • tripling of profits over the past decade that supports a ~9% yield in dividends & share repurchases, and
  • cheap stock price that implies a permanent 20% profit decline.

Federal Government Defense Spending Is Consistently Rising

This company operates within the federal market, where demand is driven less by short-term spending cycles and more by long-term national priorities. These priorities are concentrated in areas such as defense and intelligence modernization, cybersecurity and secure communications, space and missile-defense systems, command-and-control capabilities, and artificial intelligence and autonomous technologies.

Annual national defense consumption expenditures and gross investment increased from $381 billion in 2Q96 to $1.1 trillion in 2Q26. See Figure 1.

Figure 1: National Defense Consumption Expenditures and Gross Investment

Source: U.S. Bureau of Economic Analysis via FRED

Profitable Through Spending Cycles

This company has maintained consistent revenue through the normal fluctuations that come with federal contracting, including program completions, recompetes, and shifting agency priorities. At the same time, the company has steadily grown profits.

The company has generated positive net operating profit after tax (NOPAT) and positive economic earnings in each of the past 10 years. Since fiscal 2016, the company has grown revenue and NOPAT 5% and 12% compounded annually, respectively.

The company improved its NOPAT margin from 3.9% in fiscal 2016 to 7.3% over the trailing-twelve-months (TTM). Rising NOPAT margins offset falling invested capital turns and help drive return on invested capital (ROIC) from 11% in fiscal 2016 to 12% in the TTM.

Importantly, the company has proven it can materially grow profits without rapid revenue growth. Higher margins and contract execution have more than tripled NOPAT since 2016. Should the company’s shift toward higher-value work also accelerate revenue growth, profits could grow even faster moving forward.

Figure 5: Revenue and NOPAT: Fiscal 2016 – TTM ended Fiscal 1Q27

Sources: New Constructs, LLC and company filings

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