These defensive stocks are a better choice than Verint Systems

If you’re an investor in Verint Systems — a company that sells customer service automation products and services — and you’re disappointed by the stock’s 11% decline last week after missing out on profits and slow revenue growth, it might be time to look elsewhere. Right now, we think Leidos — a defense, aerospace, information technology and biomedical research company — and Huntington Ingalls Industries (NYSE: HII) — the largest military shipbuilder — look more attractive than Verint Systems.

Why? Simply because that’s what the valuation and growth numbers tell us. Leidos and Huntington Ingalls Industries have both posted higher revenue and operating profit growth than Verint Systems over the past twelve months, as well as in the most recent quarter. What’s more, both are cheaper than Verint Systems.

In fact, the strategy of deliberately shifting allocations to more attractive stocks is part of our Trefis High Quality Portfolio, which has easily beaten the S&P 500 in 2023 even though I am significantly underweight Great 7 action. Full HQ Performance History Here.

Better buys than VRNT – LDOS and HII stocks?

More specifically, to illustrate the opportunity for Leidos, you pay $12.93 per dollar of earnings before interest and taxes for LDOS stock versus $19.48 for VRNT stock, and you get higher annual growth (7.9% vs. 1.6%), higher quarterly growth (7.7% vs. 2.2%), and better margin trend (2.1% vs. 1.9%). Overall, you get higher revenue and operating profit growth from Leidos and Huntington Ingalls Industries, and you pay less than you would for VRNT stock. See our complete dashboard analysis Better bets than VRNT stock

Where’s the catch?

Can Verint Systems buck this trend? Can it grow its revenue and profits significantly faster than Leidos or Huntington Ingalls Industries in the coming quarters? Of course it can. While Verint’s sales growth was muted last quarter, the company could see some benefits from AI. In the second quarter of fiscal 2025, AI bookings increased by more than 40% year over year. The company’s software-as-a-service revenue growth also accelerated to 15% year over year, driven by AI. The company says its customers are seeing significant returns on their investments in Verint’s AI-powered bots, which could translate into stronger AI booking and revenue growth in the future.

The data below shows that both Leidos and Huntington Ingalls Industries have outperformed Verint Systems recently and over the past year. They could do so again. Related ideas: Better Buys and Outperformers

Pay less per dollar of profit than Verint Systems for higher revenue and profit growth?

HII has seen the strongest revenue growth of the three over the past twelve months, followed by LDOS. VRNT has seen the slowest growth over the period. Additionally, HII and LDOS have seen higher margin expansion compared to VRNT. However, despite this, VRNT shares are trading at a higher price-to-operating income ratio of almost 19.4x, compared to levels of around 13x to 14x for LDOS and HII.

What about relative market returns?

LDOS stock has shown stronger market performance, with returns of 62% over the past 12 months and 21% over the past 6 months. In comparison, VRNT’s returns over the same periods have been weaker at 8% and -14.5% respectively.

How did these metrics look a year ago – can VRNT’s combination of higher valuation and lower growth continue?

VRNT still had a higher valuation at 32.05x vs. 11.23x for LDOS, but lower year-over-year growth (1.1% vs. 5.5%), lower quarterly growth (-0.6% vs. 6.7%), although it saw a more favorable margin change (2.5% vs. -0.1%).

Investment Thesis for Leidos and Huntington Ingalls Industries

Leidos operates in the defense, aerospace, information technology and biomedical research sectors, which puts the company in a good position to benefit from rising defense budgets amid geopolitical tensions. The company derives most of its revenue through long-term contracts with government agencies, including the U.S. Department of Defense and the Department of Homeland Security, which provides the company with a stable revenue stream even in the face of economic headwinds. The company is likely to grow revenue by about 6% this year, according to consensus estimates, and is trading at about 16 times forward earnings.

Huntington Ingalls Industries is the largest military shipbuilder in the United States. The company builds aircraft carriers and nuclear-powered submarines and has long-term contracts with the U.S. Navy, which provides significant revenue visibility. The company’s total order book was $48.5 billion in the latest quarter. HII will also benefit from rising geopolitical tensions, as well as the U.S. Navy’s intention to modernize its fleet. The stock trades at about 16 times forward earnings.

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