Ryan Henderson (3:18)

I don't think I own any at the moment. Maybe some that are like ancillary to it. But no, I, I don't have a ton of experience investing in the industry, but I really like the secular trade here. It, it seems to me like, or I mean the sector trade, where you don't necessarily have to be a specialist to make money. In this case, like a $500 billion budget increase is a tide that lifts all boats, I imagine, for most of the prime contractors and a lot of defense contractors in the US So we'll get into it. And I think you've got some more data around just how much spend is going on globally for some of these contractors. But I think there are some interesting companies to look at. I've got three today that I found pretty intriguing. That could be big 20, 26 winners.

Brett Shafer (4:15)

Yeah, but we're not just looking for anyone that just thinks, oh, they're going to look at Lockheed Martin, General Dynamics, whatever. We're not just looking at the big fake five primes. We're looking at some smaller companies as well. But yes, for some context on the sector as a whole, a 500 billion increase would be massive. If you combine this with the $600 billion roughly in defense spending from US allies shall include Europe, Australia, East Asia and Israel. You have $2 trillion in global defense spending in 2027 and beyond. But I should note that 75% of that will still be driven by the United States. When I think about this in context with, you have things such as the recent Venezuelan operation, the Iranian threatened uprising, the Russian war in Ukraine and China. Honestly, maybe this is my patriotism speaking, but I would be worried about defense spending without China in the mix. Because if you look at the Venezuelan operation, there was just no stopping that at all. The Iranian stuff seemed, they seem like a very weak country. Russia is in a longer war with Ukraine, a tiny country, than it was with Nazi Germany. And then the Iranian government, maybe after we publish this, will have fallen. Cuba's also toast. There's a lot of other stuff we go on there where China seems like the one threat that the US is really investing towards not or I guess matching and making sure they're on par with them. And China's spending around $500 billion a year on defense when adjusted for purchasing power par not nearly as much as the $2 trillion from the US and its allies. But it's sizable. And of course it keeps talking about openly about quote unquote retaking Taiwan, which is a very complicated story. I would say it's never actually was a. Under the Chinese rule. Sorry Chinese listeners it. The Dutch and the Spanish I guess have much of a claim to it as that or Japanese or the Koreans. But it is leading to increased investments from the United States if that threat, you know, grows and grows and grows again.

Ryan Henderson (6:13)

The list of geopolitical concerns could go on and on like there are seems like a million reasons right now that. Citizens all over the world are should be cautious. And the I think that's reflected a lot in the news, maybe amplified more than it should be in the news. But I saw a viral post on on Twitter and hopefully this is true. I hate to share some of these things because I want to make sure they are true. I'm not totally sure just to be clear. So this maybe anyone that's listening, fact check me but it was someone from the Venezuelan security team I guess and it was like an interview with him around basically what happened, like what. What did they experience when last week. And if you read through it it basically sounds like a pitch for US defense contractors because it sounded like a very technologically advanced operation where it wasn't. There weren't a lot of casualties in the process which you can't really think of a better I guess process.

Brett Shafer (7:28)

Zero casualties on the US side. Yeah.

Ryan Henderson (7:31)

So anyway I recommend people reading it and that was kind of I think what part of what inspired me to want to look into the sector a little more. That plus the absolutely massive I think 50% budget increase proposed by the President. So I'll let you keep going here but I'm excited to get into a few of these companies.

Brett Shafer (7:51)

Yeah. And on top of this we also have the new space race unfolding. We have the commercial competitors of the Rocket Lab. SpaceX is readying an IPO to potentially blockbuster $1.5 trillion price. You have missions from the United States to go to the moon and Mars. I think China is also competing with that as well. Although I'm not an expert in all that stuff. There's opportunities out there for satellite players, technology for the so called golden Dome. There's immigration stuff, drug smuggling, terrorism focused missions. It goes on and on and on. And when I was thinking about how does one invest in this theme? Again, you can look at the general contractors or I wouldn't even call them the general contractors, the prime contractors, the giant ones. Those seem a little bit stodgy, a little bit boring. We want to spice things up for this episode and honestly it comes back to the comments made by the President about the, quote, certain capabilities they have or we have in regards to the Venezuelan operation. And from what we are aware of as the public, the US military was able to use some sort of technology to quote, shut off the electricity in Venezuela, freeze all their anti aircraft equipment and basically blind their entire security apparatus. So when I'm thinking about investment themes for this, it's really that technological advantage, cybertech, surveillance, jamming software systems, AI satellites and stuff in that nature. So with that in mind, Ryan and I, we went about a different way. I utilized both fiscal AI, our sponsor was Screeners, and Google Gemini to look at different defense tech companies that may be benefiting from this increased digital spending. Of course, again, like I mentioned, the prime contractors will benefit, but everyone knows about those. I want to look at some other ones as well. There are also stocks that we have touched on before such as Kraken Robotics and Rocket Lab, which we are going to let stand as their own episodes. Those are definitely related to the defense space, but we're not going to be talking about them today. Below IO four stocks, Rhinos three. We're going to kind of go through maybe five to seven minutes each, discuss them, but I think maybe after the episode we can rank the companies, we can talk about ones we like, don't like and we can kind of conclude with are we more interested? What's the conclusion question I have for us? Are you more or less interested in defense stocks? So I have my first one loaded up, Ryan, but anything else generally before we get started here?

Ryan Henderson (10:18)

No, I'll just say these are intended to be mostly quick hitters, brief synopsis of the business, what they do, why would they benefit. Maybe some financial stats, but not necessarily big episode, like full episode, deep dives by any means. But I'll let you go first. You have some more, I guess, more.

Brett Shafer (10:38)

Cyber, less obvious software.

Ryan Henderson (10:39)

Yeah, yeah, I would say less obvious beneficiaries here than my list. So why don't you kick things off?

Brett Shafer (10:45)

Okay, the first one, and I hope I'm pronouncing them right, it's leidos or leidos. L e. I d o s ticker is L dos market cap's $25 billion. This is the largest company I looked at here. It's a hybrid defense and civilian government contractor. They're focused on digital infrastructure, IT backbones, all of that type of stuff. 87% of the revenue comes from the US government. From their annual report quote our mission software aims to provide the decision advantage for protecting the homeland, securing critical infrastructure, enabling logistics and conducting multi domain operations. Long story short, they run it and software that connects all parts of the US military together. For example, we're going to use the Venezuelan operation because that's so recent in mind. But in the Venezuelan operation many branches of the military had to work together likely using Leidos software. I believe these are recurring contracts with extremely high switching costs giving them a nice steady Runway to grow and probably some pricing power when contracts come up. They also run air traffic control in the United States as well as the healthcare systems for I believe not, not the government, but specifically military stuff. And that's actually their highest margin business which gives them some diversification, maybe some steadier stuff away from any defense down cycle. On top of this they run intelligence software for the NSA and CIA to track the movements of targets. I guess you know, all for your safety everyone don't worry about those privacy concerns. For example, it has been reported that the CIA had Maduro's movements down to a T. Mossad has also been doing this in Iran for a very long time. I think they're probably using, look, we're just speculating but if you look at the annual report and you look at what the these militaries are doing, they're probably using LIDO software. And lastly the company is working in hypersonics and autonomous ships called Sea Hunter that tracks submarines and autonomous ship called Sea Hunter that tracks submarines. For that one I kind of think, well hey, maybe another beneficiary for Kraken Robotics. If we look at their latest quarter, it just seems like they have a ton of tailwinds at their back. Backlog was $43 billion, 1.3 times book to bill ratio which is not bad for anyone that doesn't know book to bill ratio is essentially it's the definition is in the title, it's how much bookings you're getting versus how much you're billing. So if you're getting a higher than one times book to bill ratio it means you're getting more orders than you're able to fulfill and your backlog is growing and it means that your overall business is growing, so it's above one. That's a good sign. Since 2016. I know I'm giving a lot of stats out here and we have a nice chart from our friends at Fiscal AI. Their operating income growth since 2016 is 20%. I would like to look at the past few years because if you look at the chart for any of the listeners, you can pull that up on Fiscal AI. It's jumped significantly in the last two years. I like to look at what happened to have this nice jump in earnings because maybe there's some normalization that's going to happen in 2026 for the next few years that's going to play a role in the valuation. But beside that, that is solid performance. If you look at the EV to EBITDA, our preferred earnings ratio for quick hitters, it's under 15. So I think quite interesting.

Ryan Henderson (14:08)

Yeah. Based on headline numbers, this is probably the most interesting one I've seen on the list. I did not realize had an ebit multiple below 15. I would like to dig in and kind of get a sense of is there some normalization that is going to happen over the next few years?

Sponsor/Ad Voice (14:28)

What do we.

Brett Shafer (14:29)

Is Palantir taking a lot of their contracts or something like that? Right.

Ryan Henderson (14:33)

Yeah, but yeah, I mean, just looking at trailing financials, that looks pretty impressive. And I imagine these are very, very sticky deals. Is there any portion of their business that's commercial or is it all pretty much government?

Brett Shafer (14:50)

87% of its revenue comes from the U.S. government. I believe the rest is from allies. So no. Wow.

Ryan Henderson (14:59)

All right, I'm going to get to my first stock here. Unless you've got any other comments on Leidos.

Brett Shafer (15:06)

I don't. And if we're mispronouncing that. Any Leidos experts, apologies.

Ryan Henderson (15:12)

Just before I get to the first stock, I want to add a little more color on Brett's comments that he had at the top of the show. So first off, the Trump or the budget proposal, this was an informal proposal for a budget increase. As far as I can tell, it was just a Trump tweet slash true social post. However, people are expecting that the White House will actually follow up and release an official budget proposal in March. So right now it is uncertain. Well, it's uncertain whether or not the proposal actually passes. But since it was an informal proposal, we don't actually know what specific sectors would see the biggest budget increases. So we don't have a sense of like $20 billion extra is going to the Golden Dome versus like submarine development. That kind of thing. So you kind of have to I guess probably assume that it's widespread and going to all sectors of the defense industry.

Brett Shafer (16:13)

I think it's likely. Well, there's some stuff that's going to be given the it has to have a budget. Things like the F35 and the Virginia class submarines which are just, they're, they're going to get their money no matter what. But if you look at the cutting edge stuff that we talked about in the opening drones, underwater drones, satellites, the golden dome stuff, missiles, sensors, software, AI it feels like that is going to. I would, I would bet that it's going to get an increase in spending proposals.

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Ryan Henderson (17:39)

Yeah, I, I said here just given the tone and a lot of the commentary, I guess probably over the last year and some of the operations that we've seen. My assumption here is that a lot of the budget increases will be focused on advanced weaponry, AI and software as well as probably a lot of space tech as well. There's been a lot of talk about satellite surveillance and obviously we've seen a lot of capital pour into the space economy over the last year or so. But since we don't have any specifics, I ran a broad screener for US Defense and aerospace stocks on fiscal AI. Pretty simple. And by the way, the screener is totally free. So if you're interested, I think this is a great way to find a list to rip through. If you're interested in the sector, just go to the screener in the industry tab. Look for defense and aerospace filter whatever countries you prefer. In this case, I was focusing specifically on the US and I didn't. I wasn't really necessarily just looking for the cheapest stocks or the highest dividend yield or anything like that because I think it's a, maybe a misleading way to find companies here. But I basically kept it open ended. I wanted to see what were the fastest growers, what were the EV to EBIT multiples of all these and maybe the highest dividend yields. There aren't. Aside from Transdigm, which I don't actually believe has a very large government business, it's primarily commercial. There weren't any big contractors that had sizable dividend yields. So unfortunately wasn't able to find any of those. But I just kind of ripped through this list, clicked on each one, used some Gemini help as well, and I found a few that I think are interesting. I'm not going to go through the whole list over audio, but if you're interested in pouring through companies, I recommend going with that approach. The first company I'm looking at today is sort of a safe play. It is the second largest defense contractor by market cap and the largest by revenue. It is RTX Corp. Formerly known as Raytheon.

Brett Shafer (19:49)

Did you know they specifically got called out by the President in an extra tweet slash truth? I don't know exactly what they did, but apparently he's not happy with them. So they get extra scrutiny for the buybacks and dividends. But either way, I mean you're about to go through it. They, they just have rock solid contracts that aren't going away.

Ryan Henderson (20:11)

Yeah, and I think all of the sizable companies have been, they look like the biggest, the easiest to critique because nominally they spend the largest amount on buybacks and dividends and capital returns. So it's easy to say they spent $10 billion on buybacks or whatever instead of investing. But like Boeing would have done that too if they didn't have all the screw ups. Like it's, it's, you know, I think part of that's just the nature of being as large of a company as they are. But yeah, my general belief here is that a $500 billion budget increase is going to benefit a lot of companies. Some are higher risk, some might have higher upside, some might be like less obvious, that might get huge bumps in project and bids. But for sure it would benefit rtx. I mean, they already have the clearance, they've got the, a lot of the barriers to entry for being a defense contractor they already have. So they're probably one of the most natural companies to work with for certain projects. And obviously they already have large contracts. But RTX operates three different segments that are all actually very similar in size by revenue so Pratt and Whitney is 36% of revenue. This is one of three major players in the aircraft engine oligopoly, which I've seen a lot of commentary about the aircraft engine space lately. It seems like there's like this renewed investor focus on the industry since GE spun off their other businesses and they.

Brett Shafer (21:51)

Realized the stock's done quite well.

Ryan Henderson (21:54)

Yeah, yeah. And now everyone seems to think it's the widest moat industry and they do seem to have really wide moats and there haven't been very, I don't think any new entrants for like 50 years into the industry. But this Pratt and Whitney gets most of their revenue from commercial customers. So it's not really the focus for this one. And then Collins Aerospace is the second largest business for them. This is 35% of revenue. All three of these, Pratt Whitney, Collins and Raytheon are basically all a third of revenue almost. In Collins Aerospace, you can think about it as Pratt and Whitney provides the engines and Collins Aerospace provides everything else. So things like avionics, flight controls, cabin interiors, landing gears, literally just like every system or widget you could think of in an airplane. There's. Collins might touch it. The third one here is Raytheon. This segment is focused exclusively on high end defense technology like missile systems, radars, torpedoes and electronic warfare systems. The reason I specifically chose RTX is mostly the missile exposure. Trump has been pretty vocal about wanting to build out the, quote, golden dome, which would be his basically national missile defense system. Raytheon is the leader here for, I mean, they generate $28 billion a year in revenue just from Raytheon. Specifically, they generate $89 billion in revenue across the whole RTX business. 27, 28 billion of that is from Raytheon. So they are the largest player not only in the defense industry generally, but specifically in the missile segment. I want to reiterate that at this moment we don't know where the extra spending, the budget increases are going to, or we have an idea, but it hasn't been specifically laid out. But I think it's pretty much a guarantee that RTX would capture some of it, which is why it should at least be on people's radars for 2026. They've got a trailing EV to EBIT of 33 times, which doesn't screen cheap. But a lot of that inflated multiple is from the Pratt and Whitney struggles recently. And the expectation is that profit margins should begin to climb again. So forward EV to EBIT looks like much cheaper than trailing. I think it's 24 times on a forward basis as opposed to 33 on a trailing. If I were betting on one single stock from this list today, this wouldn't be it. But it's hard to imagine a massive 50% budget increase for the defense sector not helping this RTX stock.

Brett Shafer (24:46)

Yeah, and I kind of, I wish they almost would just split up the two businesses because I don't like that Raytheon, if you're going for, okay, hey, there's a budget increase. We're gonna see more spending on Raytheon in general. I don't want the aerospace exposure if I don't like that. But hey, I don't know.

Ryan Henderson (25:06)

All right, let's go through GE here. Yeah, unlock a lot of value.

Brett Shafer (25:11)

The lawyers and bankers are going to do quite well with this one. Bring it together, then split it up, then bring it together, then split it up. We'll see. All right, let's speed through here to my second stock. It's a company I've never heard of at all. The name I think is just C A C I. I think I had something to do with California. But the Tigger is also C A C I. They are named, they're called CiCi International and they quote, provide information solution services for the intelligence of the US government. Market cap's $12 billion. Compared to Leidos and its IT infrastructure, CACI is more focused on cyber tech and electronic warfare. I'd say this feels like a tailor made business to benefit from the increase in defense spending. Especially when the future is cyber tech, drone jamming, all that good stuff. It looks really kind of like the dirty stuff that people don't want to talk about. Drone jamming, dark web searches for governments, laser communications in space, and the digital architecture for something like the golden dome. When I look at the business, I see steady 10% revenue growth and only a 9% operating margin which has slowly increased as they've gained scale. Of course, you know the downside of the defense sector is the lack of margin expansion potential because of those contracts that have regulated margins, cost plus stuff. Although when you look at some of these annual reports, usually it's about 50, 50 cost plus versus other type of contracts which with the cost plus is like, all right, we have our, we tell you how much it costs for us to build this and then you give us a little juice on top for what our margin is going to be. Some of the other ones are kind of fixed fee or more flexible. There's different types, but in general you're not going to see a software provider have 30, 40% operating margins, like, even if they would in a commercial environment, but starting at a 9% margin, I feel like they still have a little bit of room to grow here. And it's a good base. You know, you have this steady revenue growth. I mean, look, do I. Am I an expert on this business? No. I think they've had a couple of acquisitions, too, that if you're going to do deep research on the company, you'd want to look into. But it's 10% revenue growth over the last, I believe, 10 years. It might have been 5, but don't quote me on that. The trailing EBITDA, EBIT is 20. There's margin expansion, and it feels like a massive tailwind for these type of services. For example, one thing they mention is that they have technology to allow agencies or parts of the military to use dark web searches to see any sort of potential terrorist activity or threats that you can't find on, like, the open Web, which I would think is going to be. I don't know if it's going to be increasingly valuable, but it's still. It's going to be very, very valuable in the future. And I would assume that those contracts are quite valuable, quite lucrative for CiCi. It's. It's a very. You. You could see the intelligence agencies or the government, not like they would need the software to operate in the modern world.

Ryan Henderson (28:25)

How did you find this one?

Brett Shafer (28:28)

I believe I just did a screener, and I don't know, it just popped up. I also tossed in various prompts on Gemini. Build me some defense players that'll benefit from increased spending on various things that we've talked about. And CACI popped up. It's a company. Have you heard of this company before? I've never heard a single person talk about it.

Ryan Henderson (28:57)

No. $12 billion market cap. I have never heard tiny. No, no, that would be. Is that large cap. I think that's considered large cap.

Brett Shafer (29:06)

I think we need to adjust those filters. I would, if we're doing my. My own determination. I think it's still bit cap. Large cap to me, maybe is 25 billion and above as we sit here in 2026. Maybe that's the bubble talking to me, but yeah, mega cap, 500 billion. I don't know.

Ryan Henderson (29:25)

All right, let's get to my second stock here. L3Harris. Bad name. I'll say that it's a bad name.

Brett Shafer (29:34)

Is a spin from Lockheed Martin. Or are you about to get into that? Or am I thinking of a different company? Different company.

Ryan Henderson (29:40)

This was a merger of equals in 2019. So there was L3 Technologies and Harris Corp. And they combined in an all stock deal that immediately basically created made them the sixth largest defense contractor by revenue and what in investors are now calling the sixth prime contractor. Some investors are calling them that. So like RTX L3 Harris is now there's been so many mergers in this industry this is sort of an amalgamation of a bunch of different segments and subsidiaries. Quick side tangent here. I've said this before, but I'm not a specialist in analyzing defense contractors. In fact, I have very little experience investing in companies like this at all. And keep in mind this is a very different industry than most. Brett just mentioned this, but margins can sort of be capped if you generate a lot of revenue on a cost plus model. So analyzing it does sometimes if you're looking at individual companies you may want some experience or at least take your time diving into the defense sector for a while. However, I am intrigued because of everything we discussed earlier and as a generalist venturing into the sector, I'm not trying to find necessarily the biggest home run. I just want to generate above average returns by being in the right spot in the right year. I think that's part of the reason we're doing this episode is we think defense spending is going to be an interesting theme slash sector for 2026 specifically and 2027 given some of the budget increases. And for me that means sticking to the obvious beneficiaries, which in this case L3Harris, RTX are both kind of obvious ones. You can even take an ETF approach. But throughout pretty much throughout most of my time as an investor, I've always been a deep dive individual company, know it extraordinarily well, don't trade in and out of it, own it for a long time style investor. However, I've been inspired by some other newsletter writers that I follow where they aren't afraid to get to know a company really quickly if they think the industry is going to do well, or if they think there's a specific catalyst or an overall tailwind behind the industry and they've done well doing that. Where it's like, am I the best defense contractor investor out there? No, not by a mile. But you if you owned it over the last year like an ETF, even if you just own the iShares Defense ETF, you got 60% annual returns over the last year versus 20% in the S&P 500. So you can do well betting on specific themes. Anyway, let's get back to L3Harris. This is more of a conglomerate, I guess. Any comments there, Brett? I know that was kind of a tangent.

Brett Shafer (32:41)

I think it makes sense. The looking at a specific theme can be helpful. And it comes back to, at least for the listeners, not being afraid to invest and then research where if you look at a company, they just don't do this right before they're about to report earnings. But you look at a company and say, oh, this looks interesting. I like this name. I want to invest in it. You could always sell a few weeks later or a month later if you research the business and find that you don't like what you see. But at least for a starter position or your first kind of buy, don't be afraid to kind of jump in right away if you feel that the sector is going to have any beneficiaries. Don't. Don't be afraid to just sit there sucking your thumb.

Ryan Henderson (33:25)

Yeah, agreed. All right, L3 Harris, let's go through the different segments here. They've got space and mission systems. This used to be two separate segments, but I think they're now reporting them as one moving forward. And the segment is very, very broad. So I'm going to let Gemini give a synopsis here. It says space and mission systems develop space payloads, sensors for missile defense, satellite navigation, and electric warfare countermeasures. It also handles intelligence, surveillance and reconnaissance. Might be pronouncing that wrong. Reconnaissance, recon, recon missions, and maritime electrical systems. So it's very, it's very broad. This segment generates, I believe, around $12 billion in revenue. A little more, almost 14 billion. So a lot kind of under the hood there. And then the second one is communication system. So this is equipment for troops literally on the battlefield. So think stuff like tactical radios, night vision equipment, secure broadband communications, because you need that when you're on the battlefield. And then the last one here is Aerojet Rocketdyne. So they acquired this business in 2023. And they primarily manufacture rocket motors and propulsion systems for missiles. So if you're looking at the financials on fiscal AI, you might be thinking, Ryan, what is attractive about this growth has been meager at best. They've grown revenue by 3.8% annually since the merger in 2019. And much of that is inorganic. So why own this? My primary thinking here, I guess why I would be attracted to it is 75% of the revenue comes from government customers. So. And maybe I think that was just U.S. government, so maybe even more from international and allied governments.

Brett Shafer (35:26)

The.

Ryan Henderson (35:28)

When you get a $500 billion budget increase. You get a lot of new projects, a lot of new development, a lot of new tasks from the government or.

Brett Shafer (35:38)

Fund fund more, more units for existing systems.

Sponsor/Ad Voice (35:42)

Yeah.

Ryan Henderson (35:43)

So my thinking here is that the next few years are going to could look very different than the last few years. And it's very much a if geopolitical tensions get even worse. I mean I just described the businesses here. You could see those definitely needing to be used. So I think once again, this is one of those beneficiaries where it's a rising tide lifts all boats. They would be someone who's going to hopefully be a landing place for a lot of that budget increase. All right folks, before we move on.

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Ryan Henderson (36:36)

They've got up to 20 years of.

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Brett Shafer (37:21)

If you regularly listen to chit chat stocks then we know you love analyzing individual companies. We do too. That is why I, Brett Schaefer, co host of the show, decided to start writing the Emerging Moats stock research service. Emerging Moats produces regular stock research reports on companies with emerging competitive advantages, regular updates on stocks I own and on my watch list and has full transparency to my portfolio transactions and returns I cover under the radar. Emerging Moat companies with prior research reports on Oscar, Health, Kraken Robotics, the real brokerage and much more. Emails will be sent out on a weekly basis. Explore the service today and find your next great stock by going to emergingmotes.com the link will be in the show Notes. All right, let's go into my third stock. BWXT Technologies Market Cap is actually bigger than the one before $17.6 billion but the revenue is not that high. This one is one I've known before. It's an arable mission on my part. I saw they were monopoly but the valuation was kind of meh. Their growth wasn't that great. Now it's up 3x from here. I guess the rule of thumb is you should always invest in the stocks that I like but don't love because they seem to go up at an insane rate. Rocket lab HIMS and hers BWXT Technologies. What I'm probably missing a few there new holdings I guess is on its way to that as well. So here's the monopoly. They are the only company authorized to build nuclear reactors, nuclear fuel and equipment for the U.S. navy. I think this is quite an enviable position that will print money for years and the US Navy is a hat I think from the 1950s a nuclear program at least in some capacity for reactors for ships and submarines. And it's going to be around for a long, long time. You have the Virginia class that's going to be I think manufactured for the next few decades. They're going to be operational for decades beyond that at least hopefully. And on top of this they are researching the ability BWXT Technologies is the ability to build micro reactors for the army as well as deploying reactors into space. Working with Lockheed Mart and darpa, which is the advanced. Oh I forget what it is. It's the government advanced research projects, something like that. It's where the Internet was I think made honestly. Either that or GPS was made from there. Lots of things was made from DARPA and actually and as a side note, Waymo was started, I think at least self driving cars were started from a DARPA project. Either way that's a tangent we can go down another day. Commercial use cases are growing for this further. You know the space technology and they're also looking at potential use cases in the medical field. I will say I have no idea what nuclear and medical stuff combines into. That's something to research further. But this is a company that seems to have a really strong track record of innovation, cutting edge actually getting research projects out there. Because if you look at some of the other companies in the nuclear space, these quote unquote small modular reactor companies, the micro reactor companies, they seem to be producing just investor presentations and BWXT Technologies has decades of actually making these things and there could be a nice little bump in backlog which or sorry in demand which has interestingly led to a backlog increase of 119% year over year last quarter to $7.4 billion. The nuclear energy renaissance is really helping them. Their commercial revenues growing a hundred percent. Consolidated revenue growth is up 29% or growing at 29%. They have grown revenue at 6% annually since 2013. 13% operating margin has come down a lot. Actually wrote. I wonder why that is. I looked into that after and I forgot to write it down that they believe that they're. They're starting up a lot of new contracts now. And once you start up these contracts, the margins are low at the start. But then when you have the maintenance revenues, the service revenues that come on top of that, the margins will begin to rise again. It's kind of like investing in the factory and then getting full capacity on top of that. Unfortunately, while this looks like a fantastic business and one I could have bought it under 20 times earnings, I think in 2022. Yeah. If we're looking at the chart there, it now trades at close to 50 times earnings. It's a real shame. This would have been a nice monopoly asset to own. But I feel like if even being the most generous, we are at fair value right now, if not overvalued.

Ryan Henderson (42:17)

I wonder if they're benefiting from the energy needs from data centers.

Brett Shafer (42:24)

It's possible. I guess I didn't look fully through their annual report and conference call. I believe that could be the case. But what they do have is again the contracts with the US Navy researching the ability to use micro reactors for the army. So essentially having like a storage container, you know, like a storage container that goes onto a ship and having a reactor there, it's portable, so then you have stable energy like off the grid. I don't know exactly. The use cases of that would be. I'm not in the army. And then the space stuff would lock in darpa. I didn't see anything for what you're maybe thinking about with data centers. But I could be. I could have totally missed that. And you could be totally right because I'm just.

Ryan Henderson (43:11)

What do you think the commercial use cases are? I don't know.

Brett Shafer (43:17)

Could be that could be that for sure. I did not look that up in the shallow dive here.

Ryan Henderson (43:24)

Yeah, 50 times earnings is a bit discouraging, unfortunately. But the triple digit backlog growth on the commercial side is probably the main reason that it trades at 50 times earnings. Let's hop into my third stock. Maybe the most interesting of any of the ones I've talked about. This is Kratos Defense and Security solutions. It's a $15 billion market cap company and they're best known for their unmanned drones. So there isn't really a single product or segment that drives the business. Pretty much everything I've talked about today is some sort of conglomerate. And it sounds like maybe these big defense contractors will have like a name, a main product that helps the business kind of launch and grow. And then governments will kind of give them custom projects for other solutions over time. And before you know it they've got four different segments contributing to the top line. But anyways there's, they've got about 3, $1.3 billion in revenue. So a lot smaller than the other 2 businesses I've looked at so far. And they split that into basically two segments. So government solutions and unmanned systems. The government solutions accounts for the bulk of the business, 78% of revenue. And this includes a ton of stuff. So microwave electronic products. For my non technical listeners like myself think of this as small components like attenuators, switches, frequency converters. And often they are compiling a bunch of these small components into a custom assembly based on specific requirements from whoever that end customer is. Usually it's a department in the government. The second one here is space and satellite communications. So Kratos provides ground infrastructure for, I believe it's ground infrastructure software for space missions. They also sell antennas which seems like there's so many different sub segments of so many different like micro niche products you don't think about that have billion dollar or $10 billion defense contractors behind them. Then the last one here is training system. So Kratos uses mixed reality and simulation to train soldiers and air crews in basically immersive environments. So it's some of that AR training that a lot of people have maybe seen. And then unmanned systems accounts for basically a quarter of the business. However, this has grown very quickly. So 16.5% revenue annual revenue growth rate since 2015 and when for this segment I think most people can probably envision it just by the name, but when you watch a modern movie with aerial combat, you're likely seeing something that looks like what Kratos builds. It's these big jet powered drones used by the military. Stealthy, pretty cool looking. Honestly we don't know exactly what they.

Brett Shafer (46:40)

Do, that's probably classified, but yeah, I get what the pictures can illustrate exactly what you'd be seeing. And they fly alongside manned aircraft. Right. I believe maybe it's a different company but. So for example the F35 would have a fleet of 10 of these, whatever they're called.

Ryan Henderson (47:01)

Yeah. And some of these are apparently designed to be destroyed. So they're designed to basically go into a certain target or wherever, which I would think it's not great for. Like you're pouring all this money in as a company and then it's hey.

Brett Shafer (47:26)

That'S, they need, they need more, they need more. You know, hey, we got a refer, we get a, that's got to be a cost. We got to get more of the inventory. What?

Ryan Henderson (47:34)

That one's got to be a cost plus model.

Brett Shafer (47:37)

Yeah, yeah. Well they're not owning it, they, they're selling it to the military.

Ryan Henderson (47:41)

Yeah.

Brett Shafer (47:42)

And they need more, they need more inventory.

Ryan Henderson (47:44)

Yeah, maybe that's the, the pitch right there. But of all the companies on my list, this one probably intrigues me the most. And in my kind of quick research for Kratos, something that stood out is that they apparently are considered unique in the defense industry because they use a lot of internal funding to develop prototypes instead of waiting for government funding. So obviously waiting for government funding is a safer place. You're not really risking any capital. But this allows Kratos to kind of stay ahead of a lot of other defense contractors and will, has and will likely continue enable them to, to grow faster than the industry. And while it, a lot of these are not cost plus models. So when you're reinvesting your own internal funding instead of having a baked in margin of like, you know, your cost plus 7% or whatever, you theoretically have higher margins than other companies industry. However, at the moment they are generating less than 2% operating margins because they're going through a big development cycle. They are estimating that they'll get to 5 to 6% operating margins by 2028. But obviously when they're using internal funding, production cycles can lead to a lot of lumpiness in profitability. Right now the EV to EBIT is 600 something. So that's because they're hovering right above profitable.

Brett Shafer (49:15)

And then.

Ryan Henderson (49:17)

I think that's pretty much it. I hesitate when something has, is not profitable and I don't have necessarily a clear view on the path to profitability like this could be one where they're consistently sacrificing short term margins because they think there's a project worth investing in and they are accelerating revenue growth. And so far that's helped the stock quite a bit. But I don't know, I probably would end up taking a basket approach if I'm looking at all the stocks I own today. None of these in particular stood out to me as the obvious one to buy.

Brett Shafer (50:08)

If you look at Kratos specifically as a market cap of $15 billion, revenue is just 1.2 billion. And it's not, it's not that great. It seems fairly expensive. But yeah, let's, let's close things out with my last stock. A little bit more of a speculative play here. A fun one to end things for people that like that type of stuff. Black Sky Technologies, they operate a satellite network that is used for intelligence for the militaries. Interestingly, 91% of its backlog is from international contracts. They still haven't even won that many deals with the US military. They're at only $20 million in quarterly revenue, but they have hundreds of millions in backlog. It's next gen satellite can see images of up to, from orbit. I don't know if this is low earth orbit or higher orbit. Again, not going to be a scientist here, but they could see up to a 35 centimeter resolution. That is from space. You know, it's not, that's, that's low if you're taking a photo from three feet away. But these are from tens of thousands of feet away and they use infrared sensors to detect objects through smoke, cloud cover, et cetera. I would say this sounds highly useful for trying to track stuff for military, terrorism, immigration, drug cartels, et cetera. The old system I think had a much lower resolution. So now you can actually see what you're looking at generally. And I assume that their next generation is going to get better. So this feels like a blue ocean of growth, a nice little tailwind of an industry. You're going to want this type of stuff. If you look at what exactly they actually make money on, they sell again the imaging services where it's not real time, but within, I think their quota is 90 minutes. They want to say, all right, we're going to be going over an area, we're going to get an image for you and if something changes, we're going to send it to the general or whoever is in the decision making capabilities. All right, something changed here. You can make a decision. And they also sell their software that can help with monitoring and kind of sifting through all the images out there. Quote Black Sky Spectra software uses AI to automatically scan incoming images, accounts ships in a harbor, tracks aircraft on a Runway or flags anonymous activity like a convoy of trucks moving toward a border and sends a tip to the user instantly. We've had 90, or, excuse me, 39% revenue growth since 2020. They are broken spec, they're unprofitable, but they trade at just quote unquote, just 14 times gross profit. This feels like even though it was obviously much cheaper. Well, I guess haven't mentioned that was much cheaper in 2023. 2024 feels like a fine, high risk, high reward company if you're, if you're confident in them to take a fly on. Nice little David Garner type bet here.

Ryan Henderson (53:04)

This sounds like one that you would pass on and would 3X.

Brett Shafer (53:09)

Well, yeah, it's interesting but again, investors should remember highly unprofitable, somewhat of a premium valuation and very tiny company in the grand scheme of things here. So it's unclear whether a competitor could step in and win kind of a giant contract from the US government because again 91% of the backlog is from international contracts. They failed so far at least from the cursory look at things to win contracts from the US government. All right, closing question or go ahead. Ryan.

Ryan Henderson (53:45)

I love the way all these companies have just super opaque, dystopian sounding names. Black Sky Technology, Kratos Security Solutions.

Brett Shafer (53:57)

Yeah, exactly, exactly. Black Sky Technologies. Yeah, that is, yeah, some of the stuff will make you think about that CIA and NSA budget, you know, privacy, all that good stuff. But that's a different conversation from whether these are investable companies. I think the concluding question here and maybe talking about we are interested in defense stocks. One takeaway I would have is that looking at a lot of these companies, they're up a ton in the last year. So are they attractive right now? Maybe, maybe not. But maybe Ryan, we can go through and rank them from interest, general interest versus not interested. Yeah, I can go first. The ones, the two that interest me the most today would be CACI and Leidos because of the valuation and I think general tailwind for the industry. If we look at over stocks, I think the businesses I like versus that are just overvalued. I feel like BWXT and Kratos are both highly interesting but just traded just too high of a price for my blood. And then Black sky is obviously very speculative. And then the more traditional ones, L3Harris and RTX, I'm just generally not interested in those because I feel like they're almost bond like instruments. I don't, I don't know, it doesn't, it's just not that exciting to me. What about you?

Ryan Henderson (55:24)

I would probably rank them all similar. None of these really individually stood out to me other than maybe Leidos or Leidos like you said. RTX very bond like. Same with L3Harris. You're going to get low single digit revenue growth most likely Unless I would imagine annualized over multiple decades, you're going to get low single digit revenue growth plus maybe, I mean not even a lot of margin improvement because of the structure of a lot of their revenue. So maybe you'll get some dividends along the way. But at the moment that, that sort of capital returns approach seems to be under pressure politically.

Brett Shafer (56:14)

So yeah, that part is I guess a different, different story. We'll see. We'll see.

Ryan Henderson (56:20)

I, I am interested in the sector because of, almost purely because of everything going on geopolitically. None of these companies what I, if I didn't think that now honestly, if it weren't for Trump's tweet last week, I wouldn't be interested in any of these. But a $500 billion budget proposal increase is massive. I mean it really is massive. And you could get just the Overall basket, the ETF, whatever, the seven of these up 30% this year. Yeah, but difficulty is a lot of this was baked in six months ago.

Brett Shafer (57:03)

When yeah, it's been a nice Little tailwind in 2023, 2024, 2025 from post Ukraine war. A lot of these stocks have kind of been pricing in that something like this was going to happen. I think for me, Leidos is one I'd want to research first. Just given again, I'd like to look at this business further and see why it's trading in kind of maybe a potentially undervalued price versus what I see as a nice little tailwind for the business. But yeah, besides that, I'm with you. It's not that sexy of an industry. It's really durable, you know, in the grand scheme of the durable cash flow, but not something that's going to be hyper growth outside of maybe this 2027 one time bump. I would think, at least I would hope, if you kind of get what.

Ryan Henderson (57:51)

I'm implying for Thematic Investments, I would like to find ones where it's like this industry two years ago where you're getting much. You can get some industry wide tailwinds plus multiple RE ratings across the board. So maybe there's been some depressed valuations. People think lowly of the industry and there can be room for not only actual accelerations fundamentally at these businesses, but also investors changing their mind about the industry.

Brett Shafer (58:30)

Yep. Okay, I think that's a great way to close things out. Let's hit the disclosure and get out of here. Let us know in comment on any of these. I believe in comment on both Spotify and YouTube. You can send us an email. DM us on Twitter, DMS on substack, what have you. Let us know anything if you like these type of episodes. If you don't as well. We only want to do episodes people want to listen to and give us any other secular themes you would like us to study. But yeah, let's hit the disclosure and get out of here. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan I or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy, sell or hold them in the future. Thank you everyone. Once again it and we'll see you next time.