Quarterly earnings results are a good time to check in on a company’s progress, especially compared to its peers in the same sector. Today we are looking at RTX (NYSE:RTX) and the best and worst performers in the defense contractors industry. Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can ...

Core Insights - Baron Discovery Fund's year-to-date performance is up 10.75%, slightly trailing the Russell 2000 Growth Index's return of 11.65% [1] - In Q3 2025, the fund gained 2.85%, while the Index returned 12.19% [1] Company Overview: Mercury Systems, Inc. - Mercury Systems, Inc. has a market capitalization of $4.648 billion and specializes in components for aerospace and defense [2] - The stock experienced a one-month return of -4.61% but has increased by 132.06% over the past 52 weeks, closing at $77.44 on October 29, 2025 [2] Performance and Growth - Mercury Systems reported a revenue of $273 million in Q4 2025, reflecting a year-over-year increase of 9.9% [4] - The company has shown significant progress under CEO Bill Ballhaus since restructuring began in 2023, leading to margin expansion and benefiting from increased defense spending [3] Investment Sentiment - Mercury Systems is not among the top 30 most popular stocks among hedge funds, with 28 hedge fund portfolios holding the stock at the end of Q2 2025, up from 23 in the previous quarter [4] - While the potential for Mercury Systems as an investment is acknowledged, there is a belief that certain AI stocks may offer greater upside potential with less downside risk [4]

- Mr. . President, welcome back to Japan. - Going into this summit, there was a little anxiety about how the two would get on so far as Japan and the US have had some disagreements over trade, and there's some anxiety over defense spending, but in the end, the two hit it off remarkably well.- That's a very strong handshake. - President Trump received a very warm welcome in Japan. Not long after he got off Air Force One, he was whisked to the Imperial Palace to see the Japanese emperor for a 30-minute audien ...

Financial Data and Key Metrics Changes - The company reported record quarterly sales, non-GAAP earnings per share, and free cash flow, with sales increasing by 6.7% year-over-year and non-GAAP earnings rising by 9.2% [4] - Free cash flow reached a record $314 million, and total new orders also set a quarterly record [4] - The full-year sales outlook was raised from $6.03 billion to $6.06 billion [4][17] Business Line Data and Key Metrics Changes - In the Digital Imaging segment, sales increased by 2.2%, with growth in Teledyne FLIR sales and a modest increase in legacy DALSA and E2V businesses [8] - The Instrumentation segment saw a 3.9% increase in total sales, driven by marine instruments and environmental instruments, while electronic test and measurement systems experienced modest growth [11] - Aerospace and Defense Electronics segment sales surged by 37.6%, primarily due to acquisitions and organic growth [12] - Engineered Systems segment revenue decreased by 8.1%, but operating margin increased by 30 basis points [12] Market Data and Key Metrics Changes - The company noted that customers in China represent only 4% of sales, with minimal impact expected from being designated as an unreliable entity [6] - The ongoing U.S. government shutdown may affect about 25% of sales related to government contracts, but the overall impact is not expected to be significant [5][6] Company Strategy and Development Direction - The company is focused on pursuing significant contract opportunities in defense-related businesses, despite the current government shutdown [5] - There is a strong emphasis on maintaining a robust balance sheet while being aggressive in M&A activities, with $1 billion in free cash flow available [14] - The company is well-positioned in growing markets such as unmanned systems and space-based electronics [13] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the resilience of the company despite near-term challenges, citing a diverse portfolio that mitigates market volatility [13] - The outlook for 2026 appears positive, particularly in defense spending in Europe and growth in unmanned systems [55] Other Important Information - Cash flow from operating activities was $343.1 million, up from $249.8 million in the previous year, with free cash flow also showing significant growth [16] - The company ended the quarter with $2.0 billion of net debt, indicating a strong financial position [17] Q&A Session Summary Question: How did the growth across segments progress? - Management noted a 6.7% growth across the portfolio, with marine businesses performing strongly and variations in other segments [21] Question: What about digital imaging margins? - Margins are expected to recover, with specific investments in areas like machine vision and sensors [29][65] Question: Can you provide book-to-bill ratios for various segments? - Digital Imaging had a book-to-bill ratio of 1.12, Instrumentation was 0.9, Aerospace and Defense Electronics was 0.84, and Engineered Systems was over 2 [35][38] Question: What are the potential large contracts in defense? - Near-term opportunities exist in unmanned systems, particularly with the U.S. Marine Corps and Army programs [41] Question: How is the company addressing critical minerals availability? - The company has been diligent in managing exposure to critical minerals, with no significant short-term impact expected [46] Question: What is the outlook for the unmanned business? - The unmanned business is expected to grow, with current revenues around $500 million and significant market share gains anticipated [77] Question: How much of the EPS growth is attributed to M&A versus organic growth? - Most EPS growth is organic, with a small contribution from acquisitions [80]

From @WSJopinion: A strategy based on peace through strength is the best approach for deterring China, Russia and Iran—the axis of aggression. It requires sustained defense spending that equals 5% of GDP, write @SenatorWicker and @SenatorFischer. https://t.co/XR114CXbFn ...

Company Overview - The company is a small-cap firm based in Massachusetts with a market cap of approximately $3 billion, specializing in AI-powered drones and imaging technology for infrastructure security [2][4] - It focuses on drone technologies for various sectors, including electric and water utilities, oil and gas facilities, highway and rail systems, police, and airport security [3][4] Recent Developments - The company has seen a significant stock price increase of over 250% since January, rising from around $2 to nearly $10 [7] - Recent quarterly sales reported were approximately $4.1 million, with a subsequent quarter showing a 55% increase to over $6.4 million [9][10] - The company has a backlog of orders valued at $22 million, which is equivalent to at least one-time annual sales on a trailing basis [10][12] Strategic Moves - The company raised approximately $230 million through secondary offerings, which is close to 10% of its total existing market cap, to fund the acquisition of a competing company specializing in ground robotics and proprietary fiber optics [5][12] - The capital raised is being used for strategic acquisitions rather than to offset cash burn, indicating a focus on growth and expansion [12] Market Context - There is a renewed focus on security and defense spending, highlighted by incidents such as a drone incursion at Munich airport, which underscores the relevance of drone technology in security applications [6] - The resurgence in small-cap stocks is seen as a catalyst for the company's recent performance [8]

Core Viewpoint - Twin Disc, Incorporated (TWIN) has experienced a significant share price increase of 70.4% over the past six months, outperforming the industry growth of 11.6% and other competitors like Flowserve Corporation and Nordson Corporation [1] Company Overview - Twin Disc, established in 1918, specializes in designing, manufacturing, and selling marine and heavy-duty off-highway power transmission equipment, with operations in North America and Europe and distribution in the Asia-Pacific [3] - The product portfolio includes marine transmissions, azimuth and surface drives, propellers, power-shift transmissions, torque converters, industrial clutches, control systems, and braking systems, serving various markets through a global sales network [3] Key Tailwinds - Rising global defense spending is a major tailwind, with TWIN positioned to capture a growing defense pipeline valued at $50–75 million, which now accounts for approximately 15% of the backlog [4] - The company leads in hybrid and electrification solutions, capitalizing on sustainability trends by offering electric and hybrid systems that significantly reduce emissions and fuel consumption [5] - Strategic acquisitions have expanded TWIN's product offerings and geographic reach, diversifying revenue sources and creating synergies in manufacturing and distribution [6][7] Operational Strengths - TWIN benefits from operational initiatives that enhance margins and responsiveness, alongside a strong balance sheet that supports long-term growth [8] - The company targets a free cash flow conversion above 60% and has significantly reduced leverage from 5.5x in FY21 to 0.8x in FY25, with ambitious revenue and margin goals for 2030 [8] Challenges - Nearly 60% of TWIN's revenues come from cyclical marine and oil & gas sectors, making it vulnerable to economic fluctuations, particularly in Europe [9] - The transition to hybrid systems faces challenges such as high costs and fragmented supply chains, along with exposure to currency and geopolitical risks due to global operations [9] Valuation - TWIN is currently undervalued, trading at 0.58X trailing 12-month EV/sales, significantly lower than the industry average of 3.64X and peers like Flowserve and Nordson [10] Conclusion - The company is strategically transforming its business through defense expansion, electrification, and acquisitions, supported by operational discipline and a robust balance sheet, positioning it well to navigate near-term volatility [11][12]

Group 1 - Goldman Sachs highlights that commodities, particularly gold, are becoming key tools for hedging traditional asset risks due to factors like the independence risk of the Federal Reserve and supply chain concentration [1][4] - The firm maintains a bullish outlook on gold, setting a target price of $3,700 per ounce by the end of 2025 and $4,000 per ounce by mid-2026, with a potential extreme scenario price exceeding $4,500 per ounce [1][4] - Structural trends such as de-risking energy, increased defense spending, and dollar diversification are tightening the supply-demand dynamics in the commodity market [1][7] Group 2 - The report indicates that since spring, the market has shifted from tariff uncertainties to tariff realities, stabilizing economic activity indicators and reducing the probability of a U.S. recession [2] - Despite a slowdown in U.S. job growth, the attractiveness of commodities as a diversification tool in investment portfolios is increasing, with expectations for commodities to play a more significant role in hedging inflation and extreme risks [2] Group 3 - Goldman Sachs' baseline scenario predicts only moderate positive returns for commodity indices over the next 12 months, while maintaining bullish views on gold, copper, and U.S. natural gas [3] - The firm anticipates a surplus of 1.8 million barrels per day in the global oil market by 2026, driven by strong non-OPEC oil supply growth, which could push Brent crude prices down to $50 per barrel [3] Group 4 - The risk of the Federal Reserve's independence being compromised could lead to rising inflation, falling long-term bond prices, declining stock prices, and a weakened status of the dollar as a reserve currency [4] - If private investors diversify into gold similarly to central banks, gold prices could potentially exceed $4,500 per ounce, significantly higher than the $4,000 mid-2026 baseline forecast [4] Group 5 - Increased concentration in commodity supply poses significant risks, with key commodity supplies being concentrated in geopolitically sensitive regions [5][6] - The report cites examples like the 2022 Russia-Europe gas crisis to illustrate how supply chain vulnerabilities can impact commodity prices [6] Group 6 - The three structural trends (de-risking energy, defense spending, dollar diversification) are expected to support a long-term bull market for commodities [7][8][9][10] - Global energy security policies are driving a surge in investments in electrical grids, significantly increasing copper demand, with prices projected to reach $10,750 per ton by 2027 [8] - Increased military spending in Europe is expected to raise the GDP share from 1.9% in 2024 to 2.7% in 2027, boosting demand for industrial metals like copper, nickel, and steel [9] - Central banks have significantly increased gold purchases since 2022, driven by geopolitical tensions, which has been a core factor in the 94% rise in gold prices since then [10]

Core Insights - Rising global defense budgets and military modernization are driving sustained demand for defense contractors like RTX Corp. and Lockheed Martin Corp. [1][3] - Both companies have strong backlogs of government contracts, ensuring revenue visibility and positioning them to benefit from long-term security spending trends [1][9] Company Overview - RTX offers a diversified portfolio including commercial jet engines, avionics, space sensors, military radars, and Satcom systems [2] - Lockheed is known for flagship defense programs such as the F-35 fighter jet, Patriot and THAAD missiles, littoral combat vessels, and advanced space solutions like the Orion spacecraft [2] Financial Stability & Growth Drivers - As of Q2 2025, RTX has cash and cash equivalents of $4.78 billion and a current debt of $3.72 billion, indicating a solid liquidity position [4] - RTX's cash flow from operating activities is $1.76 billion, allowing for shareholder-friendly actions such as $50 million in share repurchases and $1.75 billion in dividends in the first half of 2025 [5] - In contrast, Lockheed's cash and cash equivalents are $1.29 billion, with long-term debt at $18.52 billion and current debt at $3.12 billion, indicating a poor solvency position [6] - Lockheed's cash flow from operations has declined to $1.61 billion, raising concerns about its liquidity [6] Growth Catalysts - Both companies are expected to benefit from the proposed 13% increase in the U.S. defense budget to $1.01 trillion for fiscal 2026, with significant funding for space dominance and missile defense initiatives [8][9] - RTX is also positioned to benefit from improving commercial air traffic, with a reported organic year-over-year sales growth of 9% in Q2 2025 [10][12] Stock Performance - Over the past three months, RTX has outperformed Lockheed, with RTX shares up 16.4% compared to Lockheed's decline of 6.1% [19] - In the past year, RTX shares surged 30.8%, while Lockheed's shares decreased by 20.1% [19] Valuation Metrics - Lockheed trades at a forward earnings multiple of 16.56, which is lower than RTX's multiple of 24.49, suggesting Lockheed may be more attractively valued [20] - Lockheed demonstrates a higher return on equity compared to RTX, indicating better efficiency in converting equity financing into profits [24] Final Assessment - Amid robust global defense spending, Lockheed is positioned as a strong contender in the defense sector, while RTX's reliance on commercial aerospace makes it more vulnerable to supply-chain disruptions [25] - Lockheed's commanding presence in flagship defense platforms and attractive valuation contrast with RTX's premium valuation and potential overvaluation [25]

Industry Dynamics - Canada is increasing defense spending [1] - Thyssenkrupp Marine of Germany is a key bidder for a multi-billion dollar submarine contract [1] Company Activities - Mark Carney is scheduled to visit Thyssenkrupp Marine [1]