Why is the Electro Optic (ASX:EOS) share price rocketing 16% today?


The Electro Optic Systems Holdings Ltd (ASX: EOS) share price is among the best-performing shares on the ASX today.

Shares in the defence technology group just keep climbing today, up 16.67% in late afternoon trade to a more than one month high of $2.24.

In contrast, the S&P/ASX 200 Index (ASX: XJO) has gained 10.9% at the time of writing.

The company hasn’t released any news that will explain its outperformance. But defence-linked shares have recently found favour due to the war in Ukraine.

The surprise Russian attack on that country has forced western countries, including Australia, to increase spending on the military.

Opposition leader Anthony Albanese will consider fitting tomahawk cruise missiles on Australia’s Collins-class submarines if he wins office this year, reported The Guardian.

Governments rushing to spend on defence

The Labor leader’s comments come after Prime Minister Scott Morrison pledged at least another $38 billion in spending to boost the Defence workforce.

Both sides of politics have committed to increase defence spending to more than 2% of GDP. No one wants to be seen to be weak on security ahead of the elections.

Australia isn’t alone either. The Russian invasion has triggered an arms race in Europe. Germany announced yesterday that it will buy 35 US-made F-35A fighter jets, reported CNN.

Germany is moving away from its pacifist posture following the end of the Second World War and wants to play a more active role in Europe’s defences.

Electo Optic’s latest profit results show growth

ASX investors are counting on some of the forecast increased spending on military equipment to flow to companies like Electro Optic.

It’s worth noting that Electro Optic posted a 17.5% increase in FY21 operating revenue to $211.8 million. The company’s earnings before interest, tax, depreciation and amortisation (EBITDA) loss also narrowed to $900,000 (before exchange rate impacts) from a loss of $3.2 million in FY20.

Electro Optic also managed to generate a positive operating cash flow of $900,000 in FY21. This compares to an outflow of $109.2 million in the previous year.

While the Electro Optics share price is strongly outperforming today, it is still down by more than 60% over the past year.

Foolish takeaway

Shareholders will be hoping that the shares have found a bottom given the positive global outlook for defence spending.

It isn’t only the Electro Optic share price that is riding higher on this thematic. The Austal Limited (ASX: ASB) share price also enjoyed a recent bounce.

The shipbuilder announced last week that it has delivered the 14th Guardian-class Patrol Boat to the Australian Department of Defence.

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