Freedom Broker initiates on micro-cap defense optics supplier Optex at 'buy'
The defense optics supplier holds an established position on long-lived U.S. and allied ground vehicle fleets, Freedom says / Photo: LinkedIn / Optex
Freedom Broker has initiated coverage on Optex Systems Holdings with a “buy” rating, citing rising defense spending as a key driver of demand for the company’s products. The analysts flag that the stock is best suited to long-term investors, given the firm's exposure to uneven defense procurement cycles.
Details
Freedom has initiated coverage of Optex shares – the first house to do so on Wall Street – with a “buy” rating, according to a note seen by Oninvest. The target price is set at $16.10 per share, implying nearly 24% upside to the stock’s closing price on Monday.
However, the shares are primarily suitable for long-term investors, Freedom said. This is because Optex is a micro cap company ($90.4 million, according to data as of Monday), with limited trading liquidity, and significant customer concentration. As a result, investors should be prepared to tolerate quarterly volatility associated with uneven defense procurement cycles, the analysts wrote.
Freedom's rationale
Optex manufactures defense optics, including optical sighting systems, for U.S. military ground vehicles, including Abrams tanks and Bradley fighting vehicles, as well as light armored vehicles. The company’s adjacent optics coatings business extends its presence into weapon optics and other programs, Freedom wrote.
In the quarter ended December 28, Optex’s revenue increased 11.6% year over year to $9.15 million. One of the drivers was increased production of periscope products, as well as deliveries of sighting systems incorporating new XM30 display periscope assemblies.
Going forward, rising defense budgets could act as a catalyst, as militaries continue to prioritize modernization, which in turn supports demand for optics, the Freedom note said.
Among the risks to the company’s outlook, the analysts highlighted potential supply chain disruptions, uneven defense funding, and Optex’s narrow focus on a limited number of defense programs. Among Optex Systems’ customers are the U.S. government and its contractors, the company said.
