As geopolitical tensions escalate — from conflict zones in Eastern Europe to strategic competition in the Indo-Pacific — defence spending around the globe is on the rise. For investors, this renewed focus on national security is creating strong tailwinds for defence stocks. In fact, many companies involved in military infrastructure, naval defence, and advanced weapons systems are starting to see booming order books and rising revenues.

The Australian Securities Exchange (ASX) is home to several defence-related businesses, but two in particular — Austal Ltd (ASX: ASB) and Electro Optic Systems Holdings Ltd (ASX: EOS) — stand out as strong candidates for capitalising on this global shift.

1. Austal Ltd (ASX: ASB)

Global Naval Shipbuilder with a Record Order Book

🔍 Overview:
Austal is a world-class designer and manufacturer of high-speed vessels and defence ships. With shipyards in Australia and the U.S., it supplies naval fleets for top military clients including the U.S. Navy, Royal Australian Navy, and Coast Guard services across the globe.

Why Austal Could Soar:

1. Record $14.2 Billion Order Book:
   The company’s backlog hit an all-time high, ensuring revenue visibility for the next several years.
2. Strategic U.S. Presence:
   Its American shipyard is proving to be a crucial asset, helping Austal win multi-billion dollar defence contracts and participate in U.S. fleet modernisation programs.
3. Support from AUKUS:
   As part of the AUKUS pact, Australia is investing heavily in naval infrastructure, including submarines and combat ships—a direct win for Austal.

Financial Highlights

In the first half of FY25, Austal delivered a strong set of financial results that reflect its solid operational performance and growing global footprint. The company reported total revenue of $825.73 million, marking a 15% year-on-year increase, driven by progress across key shipbuilding contracts. Net income more than doubled compared to the same period last year, rising to $25.11 million, thanks to improved cost efficiency and project execution. One of the most notable improvements was in operating cash flow, which surged 609% to $238.32 million, indicating stronger cash generation and enhanced working capital management. However, the company’s price-to-earnings (P/E) ratio currently stands at 77.7, signaling that the market is factoring in strong future growth potential. While this high valuation may seem stretched, it underscores investor confidence in Austal’s long-term contract pipeline and global relevance in defence manufacturing.

Risks to Consider:

1. Relies heavily on large government contracts.
2. Profit margins are vulnerable to fluctuations in steel prices and labour costs.
3. Changes in defence procurement policies could delay revenue recognition.

Investment View:

Austal is a mature, stable defence player with a global reputation and robust financials. For investors seeking long-term reliability and exposure to naval defence, this stock fits the bill.

2. Electro Optic Systems Holdings Ltd (ASX: EOS)

High-Tech Defence Innovator with Global Potential

🔍 Overview:
Canberra-based EOS is a cutting-edge technology company operating in both defence and space sectors. It develops advanced systems including:

1. Remote Weapon Stations (RWS)
2. Counter-Drone Technologies
3. Laser-Directed Energy Weapons
4. Space Surveillance Systems

Its customer base spans across Australia, the U.S., Europe, and Asia, and the company plays a vital role in modernising defence through innovation.

Why EOS Could Soar:

1. Boom in Drone Warfare:
   The rise of autonomous drones and UAVs in warfare has created urgent demand for counter-drone and laser defence systems—EOS’s specialty.
2. New Contracts & Pipeline:
   Recent wins include:

            A $28 million order for its R600S weapon station.

            Active negotiations with Ukraine, Germany, and Southeast Asia for further contracts.

3. Turnaround in Progress:
   After financial troubles in 2022, EOS has streamlined operations, sold non-core businesses, and refocused on high-margin products—putting it on a path to recovery.

Financial Highlights

Electro Optic Systems, while still in recovery mode, is showing signs of stabilisation. In the second half of FY24, the company posted revenue of $33.93 million, a modest figure that reflects its transition towards higher-margin, next-gen defence solutions. However, the company also reported a net loss of $15 million during the same period. This loss, while notable, is largely attributed to ongoing investments in research, product development, and international expansion efforts. Importantly, EOS has taken steps to strengthen its balance sheet by offloading non-core operations and streamlining its cost structure. While it hasn’t yet returned to profitability, these strategic moves have positioned the company for a potential turnaround as defence demand for its advanced technologies continues to grow.

Risks to Consider:

1. Highly project-based, leading to inconsistent earnings.
2. Global supply chain delays could impact delivery schedules.
3. Still working its way out of a period of restructuring and recovery.

Investment View:

EOS is a high-risk, high-reward stock. Its strength lies in its innovation, relevance in modern warfare, and growing international recognition. For those willing to stomach some volatility, EOS could deliver strong long-term gains.

Final Thoughts: Defence in a Volatile World

As the world faces unpredictable conflicts and military threats, defence stocks are likely to become a defensive play with offensive upside. Austal and EOS represent two ends of the spectrum—one built on scale and stability, the other on technology and disruption.

Adding either (or both) to a diversified portfolio could provide protection in uncertain times while tapping into the rising tide of global defence spending.