Are Defense Stocks a Buy in a Geopolitical and Tariff-Driven 2025?

The 2025 defense landscape is shaped by a perfect storm of geopolitical tensions, escalating tariffs, and a historic surge in global defense spending. With the U.S. Department of Defense requesting a record $849.8 billion budget for fiscal 2025, and global defense expenditures projected to exceed $2.4 trillion, the aerospace and defense sector is poised for sustained growth. For investors, this environment presents an opportunity to capitalize on high-conviction equities like Moog (MOG.A), Astronics (ATRO), and Optex Systems (OPXS), which are not only benefiting from macro tailwinds but also trading at compelling valuations.

Macro Tailwinds: Defense Spending and Tariff Dynamics

The U.S. defense budget's emphasis on hypersonic technology, unmanned systems, and solid rocket motor development underscores a strategic shift toward next-generation capabilities. For instance, $163.4 million is allocated to hypersonic R&D in 2025, while UAS spending has surged by 340% over the past decade. These trends directly align with the core competencies of defense contractors.

However, tariffs and trade policies are introducing complexity. Rising tariffs on raw materials and components are squeezing margins, forcing companies to re-evaluate supply chains. Yet, this also creates opportunities for firms with diversified operations or those leveraging domestic production. For example, Optex Systems' recent $10.2 million contract with the U.S. Army for optical sighting systems highlights the preference for domestic suppliers in a tariff-driven climate.

High-Conviction Equities: Performance and Valuation

1. Moog (MOG.A): Leveraging Aerospace and Defense Momentum

Moog's Q2 2025 results reflect its strategic positioning in high-growth areas. Revenue exceeded analyst expectations, driven by increased defense spending in Europe and new contracts in aerospace. Despite a trailing P/E of 29.68, the company's EBIT of $380.1 million and 6x interest coverage ratio suggest strong financial health. However, a debt-to-equity ratio of 55.7% and levered free cash flow of -$64.79 million highlight risks. Investors should monitor Moog's ability to sustain profitability amid supply chain pressures.

2. Astronics (ATRO): Aerospace Dominance and Backlog Strength

Astronics reported a record $204.7 million in Q2 revenue, with its Aerospace segment growing 9.4% year-over-year. The company's $645.4 million backlog, 75% of which is expected to convert within 12 months, provides visibility into future cash flows. While its P/E ratio is not disclosed, adjusted operating margins of 16.3% and a 6.9% revenue guidance increase for 2025 suggest undervaluation. Astronics' focus on commercial and military aircraft systems positions it to benefit from both defense modernization and commercial aviation recovery.

3. Optex Systems (OPXS): Undervalued Growth in Niche Defense Markets

Optex's Q2 2025 revenue surged 25.9% to $10.7 million, driven by laser filter production and periscope contracts. With a P/E of 14 and EV/EBITDA of 9.62, the stock trades at a discount to peers like Vishay Precision Group (P/E of 98.13). Its 26% ROCE and $39.2 million backlog further underscore its efficiency and growth potential. Recent contracts, including a $5.7 million laser filter award and a $1.6 million periscope deal with General Dynamics, reinforce its role in critical defense applications.

Historically, these stocks have demonstrated varied responses to earnings surprises. For instance, MOG.A has shown a 57.14% 3-day win rate and 71.43% 10-day win rate following earnings beats, with average returns of 1.83% and 2.86%, respectively. ATRO has a more modest 50.00% 3-day win rate and 60.00% 10-day win rate, with average returns of 0.57% and 1.14%. In contrast, OPXS has exhibited a strong 75.00% 3-day win rate and 85.71% 10-day win rate, with average returns of 2.50% and 3.57%. These insights suggest that while all three stocks benefit from earnings outperformance, OPXS has historically delivered the most consistent and robust short-term gains, while ATRO's returns are more muted.

Actionable Insights for Investors

1. Prioritize Undervalued High-Growth Stocks: Optex's low P/E and strong EBITDA growth make it an attractive entry point. Its focus on niche defense markets (e.g., laser filters, periscopes) offers resilience against broader economic volatility.
2. Monitor Supply Chain Resilience: Companies like Astronics and Moog with diversified operations and strong liquidity (e.g., Astronics' $191.3 million cash reserves) are better positioned to navigate tariff risks.
3. Balance Risk and Reward: Moog's high debt load and levered cash flow warrant caution. Investors should assess its ability to refinance or reduce leverage while maintaining growth.

Conclusion

In a 2025 marked by geopolitical uncertainty and tariff-driven supply chain shifts, defense stocks offer a compelling mix of resilience and growth. Astronics, Moog, and Optex exemplify how companies can thrive by aligning with macro trends—whether through advanced aerospace systems, hypersonic R&D, or niche defense contracts. For investors seeking to hedge against volatility while capitalizing on long-term tailwinds, these equities represent a strategic bet on the future of national security and technological innovation.