In today’s world, geopolitical tensions are escalating, creating a ripple effect across various industries, including defence and military. As nations ramp up their defence budgets to address these uncertainties, investors are increasingly turning their attention to military stocks. Canada, with its robust defence sector, offers a range of investment opportunities in companies that cater to the military and defence industries.
Here, we explore five stocks with military connections, either Canadian-based or operating heavily in Canada, that investors are talking about, listed by market capitalization:
5: Drone Delivery Canada Corp.
From its headquarters in Vaughan, Ontario, Drone Delivery Canada is at the forefront of drone technology, offering solutions that are increasingly relevant for military applications. The company’s drones are used for surveillance, reconnaissance and logistics, providing a versatile tool for defence operations. As the use of drones in military operations expands, Drone Delivery Canada is in a stable position to benefit from this emerging trend.
Already top player in the drone logistics sector, the company is collaborating with Volatus Aerospace (TSXV:VOL) to commercialize its remote operations centre with the Volatus Aerieport Drone Nesting Station.
Drone Delivery Canada (TSXV:FLT) has a market cap of C$42.60 million and last traded at $0.19 per share.
4: Magellan Aerospace Corp.
Magellan Aerospace is a major supplier to the global aerospace industry, including military aircraft.
The Mississauga, Ontario-based company manufactures complex aero-engine components and advanced aerostructures for military aircraft.
In July 2024 the company signed an agreement with Aequs to build a jointly owned engine maintenance, repair and overhaul business in the Aequs special economic zone at Belagavi in Karnataka, India.
With a market cap of C$533.11 million, Magellan’s longstanding relationships with leading defence contractors and governments position it well to capitalize on increasing defence budgets and modernization programs.
Magellan Aerospace (TSX:MAL) last traded at C$9.33 per share.
3: Héroux-Devtek Inc.
Catering to the defence and commercial sectors, Héroux-Devtek specializes in the design, development, manufacture and repair of landing gear and actuation systems for aerospace and defence markets. The Longueuil, Québec, company’s expertise in producing high-precision components for military aircraft makes it a key player in the defence industry. Heroux-Devtek’s contracts with defence giants such as Boeing and Lockheed Martin underscore its importance in the military supply chain.
It was recently announced that the company will be acquired by an affiliate of U.S.-based private equity firm Platinum Equity Advisors, LLC, for C$1.35 billion. The transaction is expected to close before the end of the company’s current fiscal year, March 31, 2025.
Héroux-Devtek’s market cap is C$1.05 billion.
Héroux-Devtek (TSX:HRX) last traded at C$31.19 per share.
2: Bombardier Inc.
This Montreal-based aerospace stock designs, builds, modifies and maintains aircraft for business and defence. Its customers operate a fleet of about 5,000 aircraft across the world with support from 10 service centres across six countries.
Bombardier recently showed off it its Global 7500 and Challenger 3500 aircraft at a Dubai airshow highlighting their defence capabilities.
“The Middle East is an important market for Bombardier both for business jet customers as well as growing defence business,” Éric Martel, president and chief executive officer of Bombardier, told media. “The Bombardier team on site will proudly showcase our impressive defence capabilities and the many multi-mission solutions we can flexibly tailor. We also look forward to showcasing our Challenger and Global platforms to business jets customers, who will benefit from our aircraft cutting-edge innovation, cabin design, performance, reliability, and smooth ride.”
Bombardier aircraft are also used in government and military special-mission roles across the world.
The aerospace company has a market cap of C$8.52 billion.
Bombardier (TSX:BBD.A) last traded at C$85.24 per share.
1: Leonardo DRS
Leonardo DRS has its headquarters in the United States, but it has a significant presence in Canada through various subsidiaries. The company provides defence electronics and integrated mission systems, including surveillance and reconnaissance, electro-optical/infrared systems, and advanced power solutions.
In August 2024, Leonardo made news after it was awarded a contract by the U.S. Navy to provide critical electronic combat control and sonar systems equipment for installation across the service’s fleet of submarines and allied fleets. The contract ceiling is more than US$417 million.
Utilizing a market cap of C$10.01 billion, Leonardo DRS’s innovative technologies and major partnerships make it a notable contender in the Canadian defence sector.
Leonardo DRS Inc. (NDAQ:DRS) last traded at C$38.14 per share.
Honourable mention: Liberty Defense Holdings
Vancouver-based tech company Liberty Defense Holdings has commercialized its HEXWAVE screening product, which utilizes millimetre-wave technology, advanced 3D imaging, and AI to detect concealed weapons, metallic and non-metallic, as well as prohibited items. This technology enables rapid and automated screening via a high-capacity, hands-free, walk-through portal. Along with aviation, HEXWAVE is currently in use at various high-security locations across sectors such as judicial buildings, national laboratories, correctional facilities and government installations.
Liberty Defense Holdings (TSXV:SCAN) has a market cap of C$13.79 million and last traded at $0.85 per share.
Early warning: CAE Inc. (formerly Canadian Aviation Electronics)
CAE Inc. is a global leader in training for the civil aviation, defence and security markets. With its extensive portfolio of simulation technologies and training solutions, CAE plays a critical role in the defence sector. The company’s military segment offers simulation products, training and operational support services to armed forces around the world. As global defence spending increases, CAE stands to benefit from heightened demand for its training solutions.
Investors should be aware that a class action securities lawsuit was filed against CAE that accuses the company of making false statements and / or concealed that several of its pre-COVID fixed-price defence contracts had incurred severe cost overruns, which dented the segment’s profit and operating margin, while failing to successfully reduce hard costs and achieve a sufficient level of operational efficiency.
CAE Inc. (TSX:CAE) has a market cap of C$6.07 billion and last traded at C$24.10 per share.
Future market volatility?
Market volatility is anticipated to surge as investors factor in the likelihood of rising oil prices caused by the ongoing Middle East crisis and slowing global economic growth, according to strategists at BCA Research.
In its July 2024 report, the research firm increased its estimated probability of a significant oil supply shock to 37 per cent and highlighted a 60 per cent chance of a Republican victory in the upcoming election.
“Tactically, investors should overweight energy stocks compared to other cyclicals and prioritize oil producers in the Americas over those in the Middle East,” BCA Research advised in a note.
The conflict between Israel and Hezbollah is escalating, particularly after Hamas’ top political leader was killed in an airstrike in Tehran during the first week of August. Iran, blaming Israel, has vowed retaliation. The United States has also carried out pre-emptive strikes in Iraq to protect its troops from Iran-backed forces, signalling heightened tensions as Iran hints at renewed attacks on U.S. forces.
In this context, investors are closely monitoring global oil markets, expecting a short-term price spike. This volatility is likely to continue until Hezbollah and Iran retaliate and the damage is assessed, BCA noted.
The firm also pointed out that the current macroeconomic environment supports this volatility, with weakening global demand as the U.S. economy slows, China not having a substantial economic stimulus and Europe teetering on the edge of recession.
However, the risk of oil supply shocks is expected to increase after the U.S. election, regardless of the outcome. Strategists said, “Biden, as a lame duck, may seek to cement his legacy by disciplining Iran for betraying his trust, expanding its nuclear program and attacking Israel and international shipping.”
Beyond oil volatility, the Middle East escalation could impact markets by influencing the U.S. election. This situation, along with Russia’s energy production and export restrictions, could reinforce inflation or otherwise affect the ruling party.
Canada’s role?
At the July 2024 North Atlantic Treaty Organization (NATO) summit in Washington, D.C., Prime Minister Justin Trudeau pledged to revamp the Canadian defence sector.
“We can say with confidence and assurance that we will hit the 2 per cent spending mark by 2032,” he declared.
This announcement was well-received by NATO allies, who have operated under a commitment since 2014 to spend 2 per cent of each member’s GDP on defence annually. Politico reported that this year, 23 out of the 32 NATO members will reach this target, the highest number to date.
Canada has long resisted this shift. In 2023, Canada spent only 1.37 per cent of its GDP on defence, one of the lowest levels in NATO. That same year, the Washington Post cited leaked Pentagon intelligence documents that revealed Trudeau had informed NATO allies that Canada would not meet the 2 per cent commitment and that it “never” would.
In 2024, the Canadian government committed to increased long-term spending, initially planning to reach 1.7 per cent by the end of the decade. However, also according to Politico, Canada had changed its stance under mounting pressure from other NATO allies, particularly those from Europe’s eastern flank, where defence spending is high.
In private and public, U.S. officials have also pressured Canada. In February, NATO head Jens Stoltenberg publicly urged Ottawa to contribute more, saying, “Europeans and Canada have to spend more because we haven’t seen fair burden sharing in the alliance.”
Despite Canada’s significant defence expenditure, it does not necessarily mean sufficient spending. The state of the country’s armed forces reveals issues: a leaked military report late last year described Canada’s military as severely underfunded, with half its equipment “unavailable and unserviceable,” according to Politico. The CBC highlighted deficiencies in Canadian forces deployed to NATO’s eastern flank, noting a lack of air and missile defence systems, outdated anti-tank weapons and insufficient artillery ammunition for a sustained conflict.
The Canadian government has criticized the 2 per cent goal, arguing it does not accurately reflect defence spending realities. For instance, on a 2023 NATO chart ranking nations by defence spending as a percentage of GDP, Canada was seventh from the bottom and might rank even lower in 2024 because Türkiye’s plans to boost its spending to nearly 4 per cent. However, in actual dollar terms, Canada ranks seventh from the top because with our large economy, even 1.37 per cent equates to substantial spending.
Canada also faces security challenges along its northern coast, where melting ice is opening new shipping lanes for Russia and China. Additionally, Canada appears to be lagging in future defence investments. While the recent NATO summit included a pledge for members to spend 20 per cent of their defence budgets on new equipment, Canada, along with one other NATO nation, has not met this standard. However, Canada has announced plans to buy new submarines and build icebreakers in collaboration with the United States and Finland.
Minister of National Defence Bill Blair emphasized the urgent need to boost Canada’s military presence in the Arctic, though no funding has yet been allocated for these projects.
The federal government is currently unpopular in Canada, with Justin Trudeau’s approval rating at 28 per cent, according to the Angus Reid Institute. In contrast, U.S. President Joe Biden’s lowest rating, after his awkward debate with Donald Trump, was 36 per cent, as charted by FiveThirtyEight. With an election due by October 2025, it’s possible Trudeau might not even have to follow through on his 2 per cent pledge.
The New York Times noted that Trudeau’s defence pledge is not binding if he loses to his main opponent, Conservative leader Pierre Poilievre, who poses a serious challenge. Poilievre has stated he will not commit to the 2 per cent NATO defence spending target if he becomes prime minister but has vowed to increase defence spending and cut foreign aid.
The best defence is a good portfolio
The current geopolitical climate has heightened the focus on defence and military capabilities worldwide. For investors, Canadian military stocks represent a strategic opportunity to capitalize on this rising interest. Companies such as Magellan Aerospace, Heroux-Devtek, Bombardier and Drone Delivery Canada are well-positioned to benefit from increased defence spending and technological advancements in the military sector.
As always, thorough due diligence is essential when investing in any sector.
Understanding the nuances of the defence industry and the specific strengths of these companies can help investors make informed decisions. With global tensions showing no signs of abating, Canadian military stocks are likely to remain a compelling area for investment.
What are your thoughts on the role stocks involved in defence can play in a portfolio? What aviation or military company would you like to see covered?
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(Top image source: Héroux-Devtek Inc.)