Canada’s Defense Budget: Which Stocks Could Benefit From Ottawa’s Military
Ottawa tables its federal budget on Thursday (November 5), and investors in Canadian defense and space companies will be watching one thing closely: how the government plans to pay for its push to rebuild the military.
The budget comes less than a week after the federal government released The Plan for a Stronger Canada, its first national security strategy in more than 20 years. That plan commits Ottawa to rebuilding the Canadian Armed Forces, strengthening the domestic defense industry and improving Arctic security.
For investors, the question is whether those commitments turn into firm orders and cash for companies. The third quarter showed early signs that money is starting to move from plans to paying customers; share prices, however, did not follow.
Amar Pandya, portfolio manager at PenderFund, sees that gap as a sign of where the sector sits.
Q3 recap: Stocks fell as contracts started to arrive
“I would describe Q3 as a difficult quarter for a number of leading stocks, even as the underlying businesses showed encouraging signs of progress,” Pandya said. “Share prices for key defense and space companies such as MDA Space (NYSE:MDA, TSX: MDA) and Kraken Robotics (TSXV:PNG,OTCQB:KRKNF) were down significantly during the quarter,” he said in emailed correspondence, calling the drop “a useful reminder that near-term market performance can diverge sharply from the longer-term spending outlook.”
He continued: “At the operating level, the picture was more constructive. Results released during the quarter showed solid growth at companies including MDA and Calian Group (TSX:CGY,OTCPL:CLNFF), along with signs of improving profitability. These were encouraging updates, although they did not yet provide a complete picture of the most recent quarter.”
The main business drivers included “sovereign communications, surveillance, allied defense demand and commercial satellite investment.” MDA’s satellite manufacturing growth, for example, continued to benefit from its work building Telesat’s (TSX:TSAT) Lightspeed network.
“That is important because the growth of Canadian space companies is not solely tied to new domestic defense spending; commercial programmes remain a meaningful part of the opportunity,” he said.
Financing and acquisitions also gave investors more to consider.
Kraken completed its acquisition of Covelya in July, while MDA raised capital to support a a porposed majority stake in global satellite data company, CLS.
“In my view, the key question is whether that additional capital ultimately earns an attractive return, particularly after accounting for dilution and integration risk,” Pandya said.
The share-price slide hasn’t changed Pandya’s longer-term outlook.
“I still see this as the early stages of a long investment cycle,” he said. “Replacing ageing equipment, improving readiness and building industrial capacity will take years.”…
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