Loar Industries: A Strategic Bet on Defense Resilience and Aftermarket Dominance

The global aerospace and defense sector is at an inflection point, driven by two unstoppable forces: rising military modernization budgets and the aging equipment crisis fueling massive demand for maintenance, repair, and overhaul (MRO) services. Loar Industries (ticker: LOAR) sits at the intersection of these trends, its Q1 2025 results showcasing a compound growth flywheel that investors would be wise to capitalize on. Let’s dissect why this stock is primed to deliver outsized returns in a risk-averse market.

Defense Spending Surge: A Tailwind with Global Momentum

The Pentagon’s FY2025 budget request alone includes $813 billion in defense spending, with 30% allocated to modernization and sustainment. This isn’t a U.S.-centric trend: NATO members are ramping up defense budgets to 2% of GDP, while Asia-Pacific nations are investing in advanced combat systems. Loar’s 73% year-over-year surge in defense sales ($28.8M in Q1 2025) isn’t a fluke—it’s a reflection of its niche positioning. The company supplies critical components to platforms like fighter jets and missile systems, where long lead times and geopolitical tensions ensure recurring demand.

What makes Loar unique? Unlike pure-play defense contractors, it’s vertically integrated, combining original equipment manufacturing (OEM) with aftermarket services. This dual focus creates recurring revenue streams that insulate it from one-off contract volatility. For instance, its aftermarket sales for defense equipment jumped 98% in Q1, underscoring the MRO opportunity as militaries delay costly equipment replacements.

Aftermarket Services: The Hidden Profit Engine

The real magic lies in Loar’s aftermarket dominance. Commercial aerospace aftermarket sales rose 28.8% to $32.4M in Q1, while business jet/general aviation aftermarket revenue grew 21.5%. These figures aren’t just metrics—they’re proof of Loar’s ability to monetize asset longevity. Airlines and defense customers are extending the life of existing fleets rather than buying new ones, creating a $100B+ annual MRO market.

Loar’s strategy here is brilliant: it’s not just repairing parts but upgrading systems to meet modern standards. For example, its recent acquisition of Applied Avionics (a specialist in avionics interfaces) has unlocked opportunities to retrofit older aircraft with digital systems—a $2.3B market by 2027, per Frost & Sullivan. This creates a self-reinforcing cycle: more OEM sales today mean more aftermarket contracts tomorrow.

Margin Expansion: The Flywheel’s Catalyst

Loar’s Adjusted EBITDA margin hit 37.6% in Q1, a 160-basis-point improvement from 2024. This isn’t luck—it’s operational precision. The company is:
1. Pricing smartly: Outpacing inflation with disciplined rate hikes.
2. Optimizing production: Lean manufacturing cuts costs while scaling.
3. Leveraging acquisitions: The Applied Avionics deal added $383M in synergies, with more M&A in the pipeline.

The result? A free cash flow yield of 12% (vs. 3% for the broader industrials sector). This cash machine isn’t just funding dividends—it’s fueling R&D into AI-driven predictive maintenance, which could unlock $500M in additional value by 2027.

Risks? Yes. But the Reward/Risk Ratio is Compelling

Geopolitical volatility and budget cuts are real threats. However, Loar’s diversified customer base (85% of defense contracts with Tier 1 OEMs, not direct governments) and long-term service agreements (averaging 7 years) mitigate headline risk. Even if budgets tighten, MRO demand is inelastic: you can’t ground a fighter jet without replacing its avionics.

Buy Now: The Flywheel is Spinning

At a P/E of 18x, Loar is undervalued relative to its growth trajectory. The stock is up 20% YTD but still lags its 52-week high. With guidance raised to $490M in net sales and EBITDA margins holding at 37.5%, this is a buy at current levels.

Target: $100/share by end-2025 (based on 20x the new EBITDA guidance).

Final Call to Action

Loar Industries isn’t just a stock—it’s a play on two irreversible trends. In a world of geopolitical instability and aging infrastructure, its dual exposure to defense modernization and MRO services creates a moat-defying growth story. With margins expanding and the M&A pipeline firing on all cylinders, now is the time to position for the next phase of this aerospace giant’s ascent.

Investors who act now will reap rewards as Loar’s flywheel accelerates.

Disclosure: The author holds no position in Loar Industries at the time of writing. Always conduct independent research before making investment decisions.