A&D Valuation: Why Primes Trade at 11-16x EBITDA

Introduction

Aerospace and defense companies consistently trade at premium valuations relative to the broader industrials sector, and understanding why is essential for anyone covering A&D in an industrials banking group. The median A&D transaction in Q4 2025 closed at 18.2x TEV/EBITDA, and public A&D companies maintained a median multiple of approximately 11-16x, significantly above the S&P 500 industrials average of roughly 12x. These premiums are not arbitrary; they reflect structural characteristics of the defense business model that reduce earnings risk and extend revenue visibility beyond what most industrial sub-sectors can offer.

But A&D valuation also involves sector-specific complexities that do not exist elsewhere in industrials: FAS/CAS pension reconciliation, contract type accounting differences, and backlog quality assessments that directly affect how EBITDA is defined and multiples are applied. This article covers the framework for understanding A&D premiums and the analytical adjustments that bankers make when valuing defense companies.

Five structural factors drive the persistent valuation premium across the A&D sector.

Backlog-driven revenue visibility. Defense companies operate with backlogs that represent years of contracted future revenue. When Lockheed Martin's backlog reaches $194 billion (approximately 2.5 years of revenue), investors and acquirers assign a lower risk premium to the earnings stream because the demand is already contracted. This visibility is unmatched in cyclical capital goods or building products, where demand can shift within quarters based on economic conditions. The greater the backlog relative to revenue, the higher the justified multiple.

Defense budget stability. Revenue backed by the US defense budget carries less risk than revenue backed by corporate capex decisions. The defense budget enjoys bipartisan support, has grown at approximately 4% CAGR over the past decade, and is supported by structural forces (great-power competition, NATO spending commitments) that suggest continued growth. This budget-backed demand creates a floor under defense company revenue that reduces earnings volatility and supports higher multiples.

Competitive moats and barriers to entry. Security clearances, ITAR restrictions, program incumbency, and proprietary technical data create barriers to entry that protect incumbent contractors' revenue streams. Once a company is the prime contractor on a major weapons program, the switching costs for the government customer are enormous. These moats reduce competitive risk and support premium valuations.

Aftermarket and sustainment revenue. A growing share of A&D revenue comes from maintaining, upgrading, and sustaining fielded platforms rather than building new ones. This aftermarket revenue is recurring, high-margin, and extends for decades after initial platform delivery. Companies with large aftermarket businesses (GE Aerospace, TransDigm, L3Harris) command the highest multiples because their revenue is the most annuity-like.

M&A scarcity premium. The buyer universe for A&D companies is structurally limited by CFIUS regulations, security clearance requirements, and ITAR restrictions that exclude most foreign buyers and some financial buyers. This reduced competition among potential acquirers would normally suppress valuations, but in practice the limited number of qualified buyers drives premium pricing because the few buyers who can participate (US-based strategic acquirers and cleared PE sponsors) value the assets highly and face limited alternatives.

A&D valuation requires several analytical adjustments that are either unique to the sector or carry outsized importance compared to other industrials sub-sectors.

FAS/CAS Pension Reconciliation

Major defense contractors maintain defined-benefit pension plans that are subject to two different accounting frameworks: Financial Accounting Standards (FAS) pension expense (reported in GAAP financial statements) and Cost Accounting Standards (CAS) pension cost (which determines how pension costs are allocated to government contracts and reimbursed by the government).

FAS/CAS Pension Adjustment

A reconciliation between pension cost recorded under Generally Accepted Accounting Principles (FAS expense) and pension cost reimbursed by the government under Cost Accounting Standards (CAS cost). When CAS reimbursement exceeds FAS expense, the company receives more cash from the government for pension than it reports as expense, creating a positive adjustment to operating cash flow. When FAS exceeds CAS, the opposite occurs. This adjustment can be worth hundreds of millions of dollars for large defense contractors and must be factored into EBITDA calculations for accurate valuation comparisons.

In practice, the FAS/CAS adjustment affects how bankers calculate adjusted EBITDA for defense companies. Some analysts add back the difference between FAS and CAS pension to arrive at a measure of EBITDA that reflects the company's actual cash economics on government contracts. Others use segment-level operating profit that already incorporates CAS pension treatment. The key is consistency: when building a comp set of defense companies, all companies must use the same EBITDA definition to avoid misleading comparisons.

Contract Accounting and Revenue Recognition

Defense contractors recognize revenue under ASC 606, which requires revenue recognition based on the pattern of transfer of control to the customer. For long-term defense contracts, this typically means recognizing revenue over time using either a cost-to-cost method (where revenue is recognized based on costs incurred relative to total estimated costs) or an output method (based on units delivered).

Within the A&D sector, there are meaningful valuation differences between primes and suppliers that reflect their different business models and risk profiles.

The highest multiples in A&D accrue to companies with sole-source proprietary positions and high aftermarket content. TransDigm, which acquires proprietary aerospace components with captive aftermarket demand, trades at a persistent premium to the entire A&D sector. The lowest multiples go to undifferentiated suppliers producing commodity parts where switching costs are low and margin pressure is constant.