Graham Corporation's Strategic Momentum in Defense and Space Markets: A High-Conviction Buy Opportunity

In an era of accelerating geopolitical tensions and a renaissance in space exploration, Graham Corporation (781.SG) has emerged as a standout performer, leveraging its specialized manufacturing expertise to secure a commanding position in two of the most dynamic sectors: defense and aerospace. With a record backlog, margin expansion, and strategic capital investments, the company is not just riding the wave of secular trends-it is actively shaping them. For investors seeking long-term value creation, Graham's disciplined execution and forward-looking strategy present a compelling case for a high-conviction buy.

Defense Sector: A Fortress of Growth and Margin Resilience

Graham Corporation's defense segment has been a cornerstone of its recent success. For Q3 2025, the company reported a 11.1% year-over-year increase in defense sales, driven by new programs and the ramp-up of existing contracts, according to a Business Wire release. This growth is underpinned by a robust $384.7 million order backlog, with 45% to 50% expected to convert into revenue within the next 12 months, as detailed in the same Business Wire release. Notably, 45% of this backlog is tied to the U.S. Navy, reflecting the company's critical role in supplying mission-critical equipment for naval operations, as noted in the Business Wire release.

The financial metrics further reinforce this momentum. Graham's gross margin expanded by 260 basis points to 24.8% in Q3 2025, a testament to its pricing power and operational efficiency, as noted in the Q3 FY2025 earnings call. This margin expansion, coupled with operating cash flow of $27.9 million for the first nine months of fiscal 2025, as reported in the Business Wire release, highlights the company's ability to translate top-line growth into durable profitability. As defense budgets remain elevated globally, Graham's niche expertise in high-margin, engineered solutions positions it to outperform broader industrial peers.

Strategic CapEx: Fueling Long-Term Capacity and Capabilities

Graham's capital allocation strategy is a masterclass in balancing short-term needs with long-term vision. For the first nine months of fiscal 2025, the company spent $13.8 million on CapEx, raising its full-year guidance to $15–19 million, as reported in the Business Wire release. These investments are not merely incremental; they are transformative. For instance, the company is expanding its Colorado-based Barber-Nichols facility with new CNC machining centers and a liquid nitrogen test stand, as noted in a press release, while constructing a cryogenic testing facility in Florida to meet surging demand for space-related technologies, as reported in a Q2 FY2026 earnings release.

Such strategic spending is already paying dividends. By enhancing production capacity and technical capabilities, Graham is not only securing its position in existing markets but also de-risking its exposure to supply chain bottlenecks. As stated by management, these projects are designed to "improve productivity and support long-term growth in both defense and commercial markets," as reported in the Business Wire release. This disciplined approach to CapEx-focusing on high-return projects that align with secular trends-sets Graham apart in an era where many industrial firms struggle with over-investment or under-investment.

Space Market: A New Frontier with High-Conviction Catalysts

While defense remains Graham's core strength, its foray into the space market is a game-changer. In 2025 alone, the company secured $22 million in new space contracts through its Barber-Nichols subsidiary, with orders from six leading commercial space launch providers, as reported in the press release. These contracts, expected to generate revenue over 12–24 months, underscore Graham's growing relevance in next-generation space systems. Additionally, the company reported $14.8 million in new space orders during Q2 2026, as noted in the Q2 FY2026 earnings release, signaling sustained demand beyond 2025.

Graham's competitive edge in this arena lies in its ability to deliver mission-critical components for both government and commercial clients. The construction of a cryogenic testing facility in Florida, as noted in the press release, and the development of advanced technologies like the NextGenTM steam ejector nozzle, as reported in the Q2 FY2026 earnings release, position the company to capitalize on the $500 billion global space economy. As private-sector investment in space exploration accelerates, Graham's early-mover advantage and technical expertise could translate into outsized returns.

Financial Fortitude: A Strong Balance Sheet for Scalable Growth

A critical but often overlooked aspect of Graham's appeal is its fortress-like balance sheet. The company ended Q3 2025 with $30.0 million in cash and cash equivalents, as reported in the Business Wire release, while operating cash flow grew by $8.4 million year-over-year, as noted in the same release. This liquidity provides flexibility to fund organic growth, pursue strategic acquisitions, or return capital to shareholders-all while maintaining a conservative leverage profile.

Moreover, Graham's ability to generate consistent free cash flow, combined with its elevated gross margins, suggests a business model that is both resilient and scalable. As the company continues to reinvest in high-impact projects, its cash reserves will act as a buffer against macroeconomic volatility, ensuring that growth remains uninterrupted.

Investment Thesis: A High-Conviction Buy for the Long Term

Graham Corporation's strategic alignment with secular trends-defense modernization and the space economy-positions it as a rare industrial play with both near-term visibility and long-term upside. The record backlog, margin expansion, and disciplined CapEx create a virtuous cycle of growth and profitability. Meanwhile, its entry into the space market introduces a new revenue stream with exponential potential.

For investors, the case is clear: Graham is not just adapting to industry shifts-it is leading them. With a strong balance sheet, a backlog that ensures revenue stability, and a management team focused on high-return investments, the company offers a compelling risk-reward profile. As the defense and aerospace sectors continue to converge, Graham Corporation stands at the intersection of innovation and opportunity.