Soaring Defense Spending Means Great News for These 2 Stocks

When investors focus on companies that benefit from increased defense spending, they generally think of the large contractors, such as L3Harris, Northrop Grumman, Boeing, Lockheed Martin, and RTX.

But the performance of all of those stocks has been underwhelming this year, while two lesser-known companies with exposure to defense spending have soared. The stocks for TTM Technologies (NASDAQ: TTMI) and Amphenol (NYSE: APH) are trading up more than 88% and more than 21%, respectively, so far this year.

Both companies benefit from simultaneous surges in spending across artificial intelligence (AI) infrastructure and aerospace and defense modernization. Here's why I like each of these stocks.

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They are part of the defense electronics supply chain

Both companies benefit from the wide moat around the defense electronics supply chain. The defense electronics market generally commands higher operating margins than mass-market consumer or automotive electronics due to the rigorous quality and reliability requirements of combat.

California-based TTM Technologies is one of the world's largest circuit board manufacturers, producing printed circuit boards (PCBs) and radio-frequency (RF) components for the aerospace, defense, automotive, and telecommunications industries. Its components, microelectronics, radar systems, and fully integrated mission systems are used for airborne surveillance, missile defense systems, and other mission-critical uses by the defense industry.

The company expanded its defense capabilities in August by spending $1.1 billion to acquire EPIQ Design Solutions, which makes open-architecture, AI-enabled, software-defined radios, high-performance RF products, and radiation-tolerant space compute solutions for mission-critical signals intelligence and electronic warfare applications.

In the second quarter, TTM reported record revenue of $1 billion, up 37% year over year, and earnings per share (EPS) of $0.77, up 92.5% over the same period a year ago.

Amphenol, based in Connecticut, supplies rugged military-spec connectors and ruggedized sensors used across radar arrays, naval platforms, and missile systems. Defense industry qualification hurdles give Amphenol pricing power and high recurring revenue on multiyear defense contracts.

In the second quarter, Amphenol reported revenue of $8.8 billion, up 55% year over year, and EPS of $1.37, up 59% over the same period a year ago. In the quarter, the company bought an Italian company, EI.com, which should add to its defense sales. EI.com makes interconnect solutions and high-voltage cable assemblies serving the industrial, defense, and commercial aerospace markets.

Modernization efforts provide tailwinds

Ongoing updates to the U.S. Department of Defense posture prioritize precision-guided munitions, autonomous air/ground systems, counter-drone technologies, and naval fleet expansion, all of which are heavily reliant on specialized cabling and board-level connectors that TTM provides.

Allied nations across Europe and the Indo-Pacific are also scaling up defense budgets. This spending benefits Amphenol directly because major defense contractors use standardized Amphenol components in platforms sold globally via foreign military sales.

They have other revenue streams

While defense and aerospace spending make up 37% of TTM's sales, the company is also seeing the benefit of AI data center and networking spending on its products, which account for 40% of its revenue.

Amphenol's spending is even more diverse. Its harsh environment segment accounts for 21% of its sales, but less than half of that comes from defense sales. In recent quarters, the company has seen significant growth in AI data center infrastructure, reported primarily within its communications solutions segment, which, as of the second quarter, accounted for 61% of Amphenol's sales.

High valuations, but great growth is expected

It's not unreasonable to expect continued double-digit revenue and EPS growth for both stocks. However, bear in mind that, compared to the major defense contractors, both stocks are pricey, with much higher valuations.

That's not a problem as long as current trends hold for both companies, but they could be tripped up by supply chain and production constraints, as well as any changes in the political climate that could cool defense spending. However, based on their forecasts for the third quarter, there doesn't appear to be any slowdown on the horizon.

TTM estimates that third-quarter sales will be in the range of $1.1 billion to $1.14 billion, an increase of 66% year over year at the midpoint, and adjusted EPS of between $1.21 to $1.27, up 85% over the same period last year at the midpoint.

Amphenol said it expects third-quarter revenue of $9.3 billion to $9.4 billion, up 51% year over year at the midpoint. It also estimates adjusted EPS of $1.40 to $1.42, up 52% at the midpoint from the same period last year.

The rewards outweigh the risks

Both stocks are small potatoes compared to major defense contractors, and their stocks are likely to see greater volatility. The primary concerns for prospective investors include their lofty valuations, market cyclicality, and supply chain dependencies. However, their high operating margins and niche-like moat advantages make them appealing stocks even at their current elevated prices.

Amphenol provides premium stability and strong operating margins through its high-margin harsh-environment connectors, proprietary high-speed cabling, and an aggressive, highly disciplined bolt-on merger-and-acquisition strategy. Meanwhile, TTM offers a sharper, higher-beta upside as a primary supplier of specialized high-density interconnect (HDI) printed circuit boards and integrated RF microelectronics for advanced defense radar and AI servers. Together, both companies enjoy multibillion-dollar backlogs and structural pricing power because their hardware components are deeply embedded in critical aerospace and tech supply chains.

James Halley has positions in Boeing. The Motley Fool has positions in and recommends Amphenol, Boeing, L3Harris Technologies, Lockheed Martin, and RTX. The Motley Fool has a disclosure policy.