Taylor Devices: A High-Conviction Bet on the Defense Industrial Base

In an era of geopolitical uncertainty and sustained defense spending, Taylor Devices, Inc. (NASDAQ: TAYD) stands out as a compelling long-term investment. The company's strategic focus on the defense industrial base, combined with its robust backlog visibility and resilient financial performance, positions it to capitalize on structural tailwinds in aerospace and defense markets. For investors seeking durable growth amid macroeconomic volatility, TAYD offers a rare combination of niche expertise, government contract stability, and operational discipline.

Financial Resilience Amid Macroeconomic Headwinds

Taylor Devices' fiscal 2025 results underscore its ability to navigate challenging conditions. For the full year, the company reported $46.3 million in sales, a 4% increase from $44.6 million in 2024, with net income rising 5% to $9.4 million. The fourth quarter alone saw a 29% year-over-year revenue surge to $15.6 million, driven by strong demand in aerospace/defense and industrial markets. This outperformance was critical in offsetting headwinds in the structural segment, which faced pressure from high interest rates and foreign exchange volatility.

The company's 20.3% net margin in FY25 (up slightly from 20.2% in 2024) highlights its disciplined cost management and pricing power. Even as structural markets struggled, Taylor Devices maintained profitability through operational efficiency and a favorable product mix. Earnings per share (EPS) grew to $3.01 in FY25, a 12% increase from $2.68 in 2024, while the share count continued to decline, enhancing per-share value.

Defense Market Exposure: A Strategic Moat

Taylor Devices' 70–80% revenue concentration in aerospace/defense is a key differentiator. The company's shock absorption and vibration control systems are critical components in military aircraft, armored vehicles, and defense infrastructure. This segment's resilience is evident in its $27.1 million order backlog as of June 1, 2025—a 18% decline from the prior year but still representing a significant portion of future revenue. Management estimates that 75% of this backlog is tied to defense and aerospace projects, providing visibility into near-term cash flows.

Government spending trends further reinforce this exposure. The U.S. Department of Defense's 2025 budget, coupled with global modernization efforts, has driven demand for Taylor Devices' specialized products. The company's recent exclusive partnership with Force Development Services (FDS) Ltd. for UK and European markets expands its reach in defense applications, while its BAE Systems Partner2Win Gold medallion (awarded in November 2024) underscores its reliability in supply chain-critical roles.

Backlog Visibility: A Buffer Against Cyclical Risks

While structural markets remain vulnerable to interest rate fluctuations, Taylor Devices' defense-centric backlog acts as a buffer. The $27.1 million in firm orders—expected to convert into revenue over the next 12–18 months—provides a stable foundation for growth. This visibility is particularly valuable in a high-interest-rate environment, where companies with predictable cash flows outperform peers.

The company's government-funded R&D also strengthens its competitive edge. In FY25, Taylor Devices allocated $1.14 million to defense-related research, a 40% increase from 2024. These investments ensure the company remains at the forefront of innovation in high-precision defense technologies, a critical factor in securing long-term contracts.

Strategic Initiatives: Building for the Future

Taylor Devices is not resting on its laurels. The company has aggressively expanded its global footprint, with Asian sales rising to 15% of total revenue in 2025 (up from 4% in 2024). This diversification reduces reliance on the U.S. market and opens new avenues for growth in emerging defense economies.

Capital expenditures also highlight its long-term vision. In 2025, Taylor Devices increased CapEx by 126% to $2.6 million, funding new manufacturing and testing equipment. These upgrades enhance capacity and quality, ensuring the company can meet rising demand without sacrificing margins.

Risks and Mitigants

Despite its strengths, TAYD faces risks, including customer concentration (three clients accounted for 42% of 2025 sales) and working capital challenges. A 66% increase in accounts receivable and unbilled revenue in 2025 raises liquidity concerns, though the company's strong backlog and cash flow from operations should alleviate these pressures over time.

Management's focus on profitable growth—prioritizing high-margin defense contracts over low-margin structural projects—mitigates these risks. Additionally, the company's share repurchase program (reducing the share count by 11.2% in 2025) enhances shareholder value and signals confidence in its long-term prospects.

Investment Thesis

Taylor Devices is a high-conviction play on the defense industrial base, a sector poised for sustained growth due to geopolitical tensions and modernization cycles. Its defense-focused backlog, margin resilience, and strategic partnerships create a durable competitive advantage. While structural markets may remain volatile, the company's emphasis on aerospace/defense ensures it is well-positioned to outperform in a macroeconomic downturn.

For investors with a 3–5 year horizon, TAYD offers an attractive risk-reward profile. The stock's recent underperformance (down 5.8% post-earnings) presents a compelling entry point, particularly given its 20.3% net margin, 12% EPS growth, and $27.1 million backlog. As defense spending continues to rise, Taylor Devices is likely to deliver consistent earnings and revenue growth, making it a cornerstone holding in a diversified portfolio.

Final Verdict: Buy Taylor Devices for its robust defense exposure, durable backlog, and disciplined execution. Hold for the long term to capitalize on the secular strength of the defense industrial base.