Graham Corporation (GHM): A Strategic Bet on Defense Resilience and Margin Momentum

In an era of macroeconomic volatility—marked by inflationary pressures, supply chain frictions, and geopolitical tensions—investors are increasingly drawn to companies with stable cash flows, defensible moats, and the operational agility to thrive in uncertainty. Graham Corporation (GHM), a specialist in mission-critical defense and energy infrastructure components, is emerging as a compelling candidate for those seeking such resilience. The recent $136.5 million Virginia-class submarine contract, coupled with its relentless focus on automation, workforce development, and margin optimization, positions GHM to outperform peers in a challenging environment. Here's why this is a compelling investment opportunity.

The Virginia-Class Submarine Contract: A Catalyst for Sustained Growth

On May 27, 2025, Graham secured a $136.5 million follow-on contract to supply critical turbomachinery components for the U.S. Navy's Virginia-class submarine program. This contract, which spans nearly a decade (April 2025–February 2034), underscores the company's irreplaceable role in one of the Pentagon's flagship programs. The Navy has already expanded its Virginia-class budget to $18.45 billion for two additional submarines, reflecting a broader commitment to modernizing its undersea fleet.

The contract's immediate impact is felt through Graham's backlog, which surged to $412.3 million as of March 2025—up 5% year-over-year, with 83% tied to defense work. This provides a clear runway for predictable revenue streams. Notably, Graham recognized $50 million of this contract in its fiscal 2025 fourth-quarter backlog to secure long-lead materials, a prudent move that highlights its forward-looking operational discipline.

Margin Expansion: Automation and Scale Drive Profitability

Graham's financial performance in fiscal 2025 reveals a company primed for margin upside. Revenue rose 13% to $209.9 million, while gross margins expanded to 25.2%, a 330-basis-point improvement over the prior year. Net income jumped 168% to $12.2 million, and Adjusted EBITDA reached $22.4 million. These gains are not accidental; they stem from deliberate investments in operational efficiency:

1. Automation & Capacity: Graham spent $19 million in fiscal 2025 on automation tools and facility upgrades, reducing cycle times and error rates. For example, its Arvada plant now uses advanced welding robots to handle high-precision submarine components, cutting labor costs while boosting quality.
2. Workforce Development: The company invested in welder training programs to ensure a skilled labor pool, critical for meeting rising demand. This strategy has reduced reliance on third-party contractors, lowering costs.
3. Defense Focus: With 83% of backlog in defense, the company benefits from the sector's higher margins and stable demand.

Strategic Mitigation of Macro Risks

Graham's management has proactively addressed risks that could derail peers:

• Tariffs & Supply Chains: The company forecasts tariff-related headwinds of $2–5 million in fiscal 2026 but offsets this via cost controls and vertical integration. For instance, its $2.2 million strategic investment in critical weld evaluation capabilities reduces reliance on external suppliers.
• Defense Dependency: While 83% of revenue comes from defense, this is a feature, not a flaw. U.S. submarine programs are funded through multi-year budgets, and Graham's niche role as a supplier of “no-substitute” components (e.g., submarine pumps and compressors) insulates it from cyclical swings.

Valuation and Investment Thesis

At current valuations—trading at ~12x forward EBITDA—Graham appears attractively priced relative to its growth trajectory. The company projects fiscal 2026 revenue of $225–235 million (a 7–12% increase) and Adjusted EBITDA of $22–28 million. With its backlog growing and margins expanding, it's well-positioned to hit its long-term targets of 8–10% organic growth and low-to-mid teens EBITDA margins by 2027.

The stock's valuation contrasts sharply with its peers in the defense sector, many of which face margin compression or geopolitical headwinds. Graham's scalability in high-margin defense work, combined with its energy infrastructure exposure (8% aftermarket sales growth in 2025), creates a dual-engine growth model.

Conclusion: A Buy with a Long-Term Horizon

Graham Corporation is not just a beneficiary of defense spending—it is a strategic partner to the U.S. military, with irreplaceable technical expertise. Its execution on automation, backlog management, and margin discipline positions it to outperform even as macro challenges persist. At current prices, the stock offers a compelling risk-reward profile for investors seeking stability and growth in turbulent markets.

Recommendation: Buy Graham Corporation (GHM) with a 12–18 month horizon. Monitor closely for further contract wins and margin improvements.

Risks: Supply chain disruptions, delays in submarine production schedules, or a sharp economic downturn. Diversification and careful position sizing are advised.