We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
The 9/11 attack on U.S. soil in 2001 triggered the ‘War on Terror,’ which intensified manifold with the Islamic State of Iraq and Syria (ISIS) gaining ground in recent years. The incoming Trump administration’s campaign pledges to pursue the threat of terrorism more vigorously and broadly strengthen the country’s defenses has raised hopes of increased spending on defense and intelligence services. This has encouraged investors to closely track defense stocks and the sector overall.
Increasing threats, uncertainty and the rising need to safeguard the interest of nations and people have pushed up demand for weapons. The ongoing geo-political tension across the Middle East, continued saber-rattling by North Korean leadership and high tensions over the disputed ownership of islands in the East and South China Sea have been the other catalysts to the constant competition among nations in manufacturing military goods.
Although the global aerospace and defense industry suffered a setback for the past three years as a result of weaker U.S. defense budgets, this year a total rebound is expected. The increase in the domestic defense budget and growth in defense budgets of important allied nations spurred by emergent global security threats are expected to aid the sector as a whole.
The U.S. remains atop all nations when it comes to military expenditures. Military spending consumes more than 50% of the U.S. discretionary budget, way ahead of the second-spot occupant China and third, Russia.
Many of the defense majors in the nation are doing a decent job, propelled by the following strategies:
Budget Stability: On the eve of Halloween 2015, Congress approved a crucial bipartisan budget agreement, in line with the White House. Although it was $5 billion short of the President's 2016 defense budget request, the comprehensive two-year budget deal, unveiled on Oct 26, 2015, has been expected to give Pentagon planners the fiscal stability they have been pleading for.
Adding to the positive sentiment, U.S. Defense Secretary Ash Carter unveiled the fiscal 2017 (FY 2017) defense budget this past February. Among the priorities, the budget seeks a major boost in funding for the fight against ISIS as part of its FY 2017 defense budget request. In particular, the budget requests for a fund of $11 billion for the Department of Defense (DOD) and the Department of State to support U.S. efforts to continue hunting down terrorists -- especially those hailing from ISIS -- as well as to support a political solution to the Syrian civil war. This signifies a potential stepping up of U.S. military efforts.
The proposed budget also seeks to enhance spending in several key areas, including cybersecurity, electronic warfare and increased security for crucial U.S. satellites. Funds of $8.1 billion for submarines (with over $40 billion in the next five years) bring into focus the likes of Huntington Ingalls Industries, Inc. (HII - Free Report) and General Dynamics Corp. (GD - Free Report) .
Now, as Donald Trump gets ready to take over the Oval Office in Jan 2017, a few changes can be expected, especially if defense proposals during his presidential campaign are considered. His plan, at that time, included raising the number of active Army troops from 475,000 to 540,000, raising the number of Marine battalions from 24 to 36, expanding the naval fleet from a planned 280 to 350 and adding more Air Force fighter aircraft to at least 1,200. If these plans of Trump are finally implemented, it will definitely boost the major defense players.
Foreign Military Sales (FMS): The big defense operators are expanding their markets, with foreign sales acting as a key top-line growth driver. Driving demand for foreign sales is a number of escalating regional conflicts, such as the ongoing Syrian civil war, the unsettled situation in Iraq, Yemen and Libya, and tensions in Eastern Europe. Apart from the U.S., U.K. or France, a number of emerging markets as well as nations, such as India, Japan, the United Arab Emirates, Saudi Arabia and Brazil, are increasing defense spending and generating business for the U.S. aerospace and defense companies.
Defense stocks are in the spotlight as countries in Europe and the Middle East may need to ramp up their defense spending in order to combat the threats posed by ISIS. Indeed, Britain has planned to boost its defense equipment budget by 7% over the next 10 years. The total budget amounts to approximately $270 billion, including the uplift in equipment spending, the purchase of nine new Boeing P8 maritime patrol aircraft and two new strike brigades by 2025.
In this regard, the $38 billion U.S.-Israel defense deal inked in Sep 2016, for a total of 10 years, is worth mentioning. This deal represented the largest ever military aid pledged by the U.S. to any foreign nation. The new aid package reflects an increase of $700 million over the existing contract between the two nations under which Israel is receiving $3.1 billion annually.Pentagon’s two prime defense contractors – The Boeing Company (BA - Free Report) and Lockheed Martin Corp. (LMT - Free Report) – are expected to gain the most from this deal. Under this deal, Israel will receive 33 F-35 jets of Lockheed Martin.
The deal also calls for the delivery of 10 Boeing F-15 aircraft to Israel.Other military systems like C-130 heavy-lift cargo planes, four SAAR 6 Corvettes, Merkava tanks and Namer Armored Personnel Carriers, Hellfire missiles, the Joint Direct Attack Munition (JDAM), and other Precision Guided Munitions will also be delivered to the country.
There are some questions about the incoming administration’s commitment to allies and global alliances, with the President-elect repeatedly referring to insufficient contributions from many alliance partners during the campaign. We will see how the U.S. government’s policy on this front evolves after the new administration takes charge, but these comments during the campaign has added to unease among many partners.
Restructuring/Acquisition: To maintain margins in a tough business environment, companies are squeezing costs out of their operations and diversifying into new business areas. Commercial aviation is one such diversification play, with opportunities in emerging markets driving the trend.
New macro challenges are prompting industry players to revisit their business models. One such example is the recent takeover of Camber Corporation – a government services company – by Huntington Ingalls, for a value of $380 million. Camber is a pure-play provider of sophisticated mission-based and information technology solutions. The acquisition is intended to diversify Huntington Ingalls’ revenue stream and add new information technology work with the U.S. defense, intelligence and civilian agencies.
Earlier, L-3 Communications Holdings Inc. purchased Micreo Limited, a specialized Electronic Warfare subsystems provider. Micreo specializes in solutions that employ high-performance microwave, millimeter wave and photonic technology. Its business line should align perfectly with L-3 Communications’ wide range of sensors.Additionally, Micreo has counter-IED capabilities that will bolster L-3 Communications’ existing line of man-portable and vehicle electronic counter measures (ECM) equipment.
Increase in Cyber Spending: Computer attacks are among the most pressing security challenges facing the U.S. Increasing cyber-attacks, terrorism threats, and enhanced geopolitical instability are driving focus toward electronic warfare, C4ISR (Command, Control, Communication, Computers, Intelligence, Surveillance and Reconnaissance) and cybersecurity. In this context, President Obama in the fiscal 2017 budget proposal has asked for $19 billion for cyber security across the U.S. government, an increase of $5 billion over fiscal 2016.
We don’t know the full extent of the incoming administration’s cybersecurity policy, but it is reasonable to assume continuation of existing measures at the minimum. Questions about Russia’s involvement in election related hacking incidents has elevated this issue even further.
Next-Generation Technology: At the macro level, there has been a gradual shift in defense spending patterns. In response to asymmetric terrorist threats, the emphasis appears to have shifted to high-tech intelligence equipment, replacing demand for conventional big guns and heavy armor.
The major industry players have, in response, resorted to bolt-on acquisitions to plug gaps in their product offerings. A focus on R&D is also helping these companies to develop next-generation technologies essential in a climate of fewer programs and reduced budgets.
As of now, the Pentagon intends to invest $2 billion over the next five years to acquire more of Raytheon’s Tomahawk missiles and upgrade their capabilities. This would bring the U.S. inventory of the missiles to more than 4,000.
Northrop Grumman Corp (NOC - Free Report) is bringing more focus to its airborne and space ISR business by realigning its divisions. In particular, the emphasis is on ISR systems, advanced electronics and software development technologies. It is the proud owner of the popular Global Hawk, an unmanned system with the ability to transform itself into an operational weapons system when required. Northrop also boasts products like the E-2D Advanced Hawkeye, which provides 360-degree surveillance at all times.
Although sequestration has been an issue for the space for a while now, we are bullish on Engility Holdings, Inc. , Arotech Corporation and Northrop Grumman; all three sport a Zacks Rank #1 (Strong Buy). We are also positive on stocks like Ducommun Inc. (DCO - Free Report) , Leidos Holdings, Inc. (LDOS - Free Report) and Spirit AeroSystems Holdings, Inc. (SPR - Free Report) ; all three carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Bottom Line
President-elect Trump has been a supporter of higher defense spending from the very beginning. So investing in defense looks to be a good idea now -- particularly buying attractive stocks, like those mentioned above, on the dip.
Our Best Private Investment Ideas
How would you like to see specific recommendations to capitalize on current market conditions?
Starting today, for the next month, you can follow all Zacks' private buys and sells in real time. Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from insider buys to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors. Click here for Zacks' private trades >>
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Has the Defense Industry Outlook Really Improved?
The 9/11 attack on U.S. soil in 2001 triggered the ‘War on Terror,’ which intensified manifold with the Islamic State of Iraq and Syria (ISIS) gaining ground in recent years. The incoming Trump administration’s campaign pledges to pursue the threat of terrorism more vigorously and broadly strengthen the country’s defenses has raised hopes of increased spending on defense and intelligence services. This has encouraged investors to closely track defense stocks and the sector overall.
Increasing threats, uncertainty and the rising need to safeguard the interest of nations and people have pushed up demand for weapons. The ongoing geo-political tension across the Middle East, continued saber-rattling by North Korean leadership and high tensions over the disputed ownership of islands in the East and South China Sea have been the other catalysts to the constant competition among nations in manufacturing military goods.
Although the global aerospace and defense industry suffered a setback for the past three years as a result of weaker U.S. defense budgets, this year a total rebound is expected. The increase in the domestic defense budget and growth in defense budgets of important allied nations spurred by emergent global security threats are expected to aid the sector as a whole.
The U.S. remains atop all nations when it comes to military expenditures. Military spending consumes more than 50% of the U.S. discretionary budget, way ahead of the second-spot occupant China and third, Russia.
Many of the defense majors in the nation are doing a decent job, propelled by the following strategies:
Budget Stability: On the eve of Halloween 2015, Congress approved a crucial bipartisan budget agreement, in line with the White House. Although it was $5 billion short of the President's 2016 defense budget request, the comprehensive two-year budget deal, unveiled on Oct 26, 2015, has been expected to give Pentagon planners the fiscal stability they have been pleading for.
Adding to the positive sentiment, U.S. Defense Secretary Ash Carter unveiled the fiscal 2017 (FY 2017) defense budget this past February. Among the priorities, the budget seeks a major boost in funding for the fight against ISIS as part of its FY 2017 defense budget request. In particular, the budget requests for a fund of $11 billion for the Department of Defense (DOD) and the Department of State to support U.S. efforts to continue hunting down terrorists -- especially those hailing from ISIS -- as well as to support a political solution to the Syrian civil war. This signifies a potential stepping up of U.S. military efforts.
The proposed budget also seeks to enhance spending in several key areas, including cybersecurity, electronic warfare and increased security for crucial U.S. satellites. Funds of $8.1 billion for submarines (with over $40 billion in the next five years) bring into focus the likes of Huntington Ingalls Industries, Inc. (HII - Free Report) and General Dynamics Corp. (GD - Free Report) .
Now, as Donald Trump gets ready to take over the Oval Office in Jan 2017, a few changes can be expected, especially if defense proposals during his presidential campaign are considered. His plan, at that time, included raising the number of active Army troops from 475,000 to 540,000, raising the number of Marine battalions from 24 to 36, expanding the naval fleet from a planned 280 to 350 and adding more Air Force fighter aircraft to at least 1,200. If these plans of Trump are finally implemented, it will definitely boost the major defense players.
Foreign Military Sales (FMS): The big defense operators are expanding their markets, with foreign sales acting as a key top-line growth driver. Driving demand for foreign sales is a number of escalating regional conflicts, such as the ongoing Syrian civil war, the unsettled situation in Iraq, Yemen and Libya, and tensions in Eastern Europe. Apart from the U.S., U.K. or France, a number of emerging markets as well as nations, such as India, Japan, the United Arab Emirates, Saudi Arabia and Brazil, are increasing defense spending and generating business for the U.S. aerospace and defense companies.
Defense stocks are in the spotlight as countries in Europe and the Middle East may need to ramp up their defense spending in order to combat the threats posed by ISIS. Indeed, Britain has planned to boost its defense equipment budget by 7% over the next 10 years. The total budget amounts to approximately $270 billion, including the uplift in equipment spending, the purchase of nine new Boeing P8 maritime patrol aircraft and two new strike brigades by 2025.
In this regard, the $38 billion U.S.-Israel defense deal inked in Sep 2016, for a total of 10 years, is worth mentioning. This deal represented the largest ever military aid pledged by the U.S. to any foreign nation. The new aid package reflects an increase of $700 million over the existing contract between the two nations under which Israel is receiving $3.1 billion annually.Pentagon’s two prime defense contractors – The Boeing Company (BA - Free Report) and Lockheed Martin Corp. (LMT - Free Report) – are expected to gain the most from this deal. Under this deal, Israel will receive 33 F-35 jets of Lockheed Martin.
The deal also calls for the delivery of 10 Boeing F-15 aircraft to Israel.Other military systems like C-130 heavy-lift cargo planes, four SAAR 6 Corvettes, Merkava tanks and Namer Armored Personnel Carriers, Hellfire missiles, the Joint Direct Attack Munition (JDAM), and other Precision Guided Munitions will also be delivered to the country.
There are some questions about the incoming administration’s commitment to allies and global alliances, with the President-elect repeatedly referring to insufficient contributions from many alliance partners during the campaign. We will see how the U.S. government’s policy on this front evolves after the new administration takes charge, but these comments during the campaign has added to unease among many partners.
Restructuring/Acquisition: To maintain margins in a tough business environment, companies are squeezing costs out of their operations and diversifying into new business areas. Commercial aviation is one such diversification play, with opportunities in emerging markets driving the trend.
New macro challenges are prompting industry players to revisit their business models. One such example is the recent takeover of Camber Corporation – a government services company – by Huntington Ingalls, for a value of $380 million. Camber is a pure-play provider of sophisticated mission-based and information technology solutions. The acquisition is intended to diversify Huntington Ingalls’ revenue stream and add new information technology work with the U.S. defense, intelligence and civilian agencies.
Earlier, L-3 Communications Holdings Inc. purchased Micreo Limited, a specialized Electronic Warfare subsystems provider. Micreo specializes in solutions that employ high-performance microwave, millimeter wave and photonic technology. Its business line should align perfectly with L-3 Communications’ wide range of sensors.Additionally, Micreo has counter-IED capabilities that will bolster L-3 Communications’ existing line of man-portable and vehicle electronic counter measures (ECM) equipment.
Increase in Cyber Spending: Computer attacks are among the most pressing security challenges facing the U.S. Increasing cyber-attacks, terrorism threats, and enhanced geopolitical instability are driving focus toward electronic warfare, C4ISR (Command, Control, Communication, Computers, Intelligence, Surveillance and Reconnaissance) and cybersecurity. In this context, President Obama in the fiscal 2017 budget proposal has asked for $19 billion for cyber security across the U.S. government, an increase of $5 billion over fiscal 2016.
We don’t know the full extent of the incoming administration’s cybersecurity policy, but it is reasonable to assume continuation of existing measures at the minimum. Questions about Russia’s involvement in election related hacking incidents has elevated this issue even further.
Next-Generation Technology: At the macro level, there has been a gradual shift in defense spending patterns. In response to asymmetric terrorist threats, the emphasis appears to have shifted to high-tech intelligence equipment, replacing demand for conventional big guns and heavy armor.
The major industry players have, in response, resorted to bolt-on acquisitions to plug gaps in their product offerings. A focus on R&D is also helping these companies to develop next-generation technologies essential in a climate of fewer programs and reduced budgets.
As of now, the Pentagon intends to invest $2 billion over the next five years to acquire more of Raytheon’s Tomahawk missiles and upgrade their capabilities. This would bring the U.S. inventory of the missiles to more than 4,000.
Northrop Grumman Corp (NOC - Free Report) is bringing more focus to its airborne and space ISR business by realigning its divisions. In particular, the emphasis is on ISR systems, advanced electronics and software development technologies. It is the proud owner of the popular Global Hawk, an unmanned system with the ability to transform itself into an operational weapons system when required. Northrop also boasts products like the E-2D Advanced Hawkeye, which provides 360-degree surveillance at all times.
Although sequestration has been an issue for the space for a while now, we are bullish on Engility Holdings, Inc. , Arotech Corporation and Northrop Grumman; all three sport a Zacks Rank #1 (Strong Buy). We are also positive on stocks like Ducommun Inc. (DCO - Free Report) , Leidos Holdings, Inc. (LDOS - Free Report) and Spirit AeroSystems Holdings, Inc. (SPR - Free Report) ; all three carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Bottom Line
President-elect Trump has been a supporter of higher defense spending from the very beginning. So investing in defense looks to be a good idea now -- particularly buying attractive stocks, like those mentioned above, on the dip.
Our Best Private Investment Ideas
How would you like to see specific recommendations to capitalize on current market conditions?
Starting today, for the next month, you can follow all Zacks' private buys and sells in real time. Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from insider buys to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors. Click here for Zacks' private trades >>