Moog's Q2 2025 Earnings Surge Amid Defense Growth and Margin Resilience

Moog Inc. (NYSE: MOG.A) delivered a cautiously optimistic second-quarter 2025 report, with revenue growth and margin stabilization underscoring its strategic pivot to high-margin defense programs. While adjusted earnings per share (EPS) fell due to the expiration of a temporary tax benefit, the company reaffirmed its full-year guidance, signaling confidence in its ability to navigate near-term headwinds. The results highlight Moog’s dual challenge: leveraging defense momentum while managing margin pressures tied to geopolitical and fiscal factors.

Defense Dominance Drives Revenue Growth
The most striking performance came from Moog’s military aircraft segment, which surged 6% to $214 million, driven by the Future Long-Range Assault Aircraft (FLRAA) program and broader U.S. Air Force modernization efforts. This segment’s operating margins expanded 280 basis points to 11.1%, reflecting the high profitability of defense contracts. Meanwhile, the commercial aerospace segment grew 4% to $216 million, benefiting from robust aftermarket demand despite production delays in business jets and narrow-body aircraft.

However, the space and defense segment—a key growth area—posted a 370-basis-point margin contraction to 12.1%, primarily due to the loss of a one-time tax benefit. The industrial segment, which Moog is strategically divesting from, declined 7% to $234 million, though its margins improved 50 basis points to 11.6%, underscoring the benefits of portfolio simplification.

Margin Pressures and the Tax Factor
The $1.92 adjusted EPS fell 12% year-over-year, a decline directly tied to the expiration of a 150-basis-point tax benefit from the 2023 Employee Retention Credit (ERC). Excluding both the ERC and restructuring costs, core operating margins improved 40 basis points, indicating underlying operational efficiency gains. Management emphasized that excluding these one-time effects, margins are stabilizing.

The company also reported a modest $2 million in free cash flow, a stark improvement from -$84 million in the prior-year period, driven by better working capital management. This cash flow recovery is critical for sustaining R&D investments and share buybacks, though Moog’s leverage ratio remains elevated at 2.8x EBITDA—a point of caution for debt-sensitive investors.

Guidance and Risks Ahead
Moog reaffirmed its full-year 2025 guidance: $3.7 billion in sales and $8.20 in adjusted EPS, with a 50% free cash flow conversion target. Management highlighted two key risks:
1. Tariff-Related Costs: A potential $10–$20 million drag on operating profit in 2025 from Chinese import tariffs, which Moog aims to mitigate through pricing adjustments and supply chain diversification.
2. Defense Execution: The success of programs like FLRAA and the U.S. Air Force’s KC-46 tanker will determine whether military sales can offset margin pressures.

Valuation and Investment Thesis
At ~14x 2025 adjusted EPS estimates, Moog trades at a discount to its five-year average valuation of ~16x, reflecting investor skepticism about near-term margin recovery. However, the company’s $2.5 billion backlog—a record for Moog—suggests solid demand visibility. Defense programs, which now account for ~45% of sales, offer higher margins and less cyclical exposure than commercial aerospace.

Long-term investors may find value in Moog’s position as a supplier to U.S. defense modernization efforts, a theme likely to endure amid rising global military spending. The stock’s 12-month price target of $150 (up from its current $135) hinges on margin stabilization and tariff mitigation.

Conclusion
Moog’s Q2 results reveal a company navigating a complex landscape: defense growth is real, but margin pressures and macroeconomic risks remain. While the tax headwind and tariff challenges are valid concerns, the core operational improvements and robust backlog suggest Moog is positioned to outperform peers in a sector where precision engineering and defense spending are king. With a valuation below its historical norms and a clear path to margin recovery, Moog offers a compelling risk-reward trade for investors willing to look past near-term noise.

For now, the earnings beat and reaffirmed guidance signal that Moog’s focus on high-margin aerospace and defense programs is paying off—albeit with execution still critical to fully unlock shareholder value.