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U.S. FY23 DoD Budget Proposal Seeks 4.1% Hike: Stocks to Gain

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The U.S. administration’s budget request for fiscal 2023 includes an investment proposal of $773 billion for the Department of Defense (DoD), which implies a 4.1% increase from fiscal 2022’s enacted amount.

This is the second budget request put forward by President Biden and it entails an increased focus on threats posed by China, the heightening tensions surrounding the Russia-Ukraine crisis and the nuclear modernization program. The budget request is likely to boost the growth prospects of U.S. defense majors like Lockheed Martin (LMT - Free Report) , Boeing (BA - Free Report) , Northrop Grumman (NOC - Free Report) , General Dynamics (GD - Free Report) and Huntington Ingalls Industries (HII - Free Report) in the coming days.

Highlights of the FY2023 Budget

The fiscal 2023 budget requested $130.1 billion for research and development (R&D), thereby once again proposing an all-time high spending provision for R&D. This proposal indicates an improvement of 16.2% compared with fiscal 2022’s request.   

The budget also includes a 4.6% pay raise for troops and civilian Defense Department employees, an improvement from the 2.7% pay hike sought in the last fiscal’s budget proposal.

The fiscal 2023 DoD budget also identifies China as a strengthening deterrent for the nation in the Indo-Pacific region. Also, the budget includes investment plans to tackle the aggressive threats made by Russia in recent times along with the constantly emerging threats posed by North Korea, Iran, and violent extremist organizations.

In particular, the budget proposes spending of $6.1 billion for the Pacific Deterrence Initiative and $4.2 billion for the European Deterrence Initiative, including $300 million in assistance to Ukraine and support Security Cooperation programs within the USEUCOM Area of Responsibility.

Product-wise, the fiscal 2023 DoD budget proposal requests funding worth $56.5 billion for aircraft, $40.8 billion for the Navy, $34.4 billion for nuclear modernization, $27.6 billion for space and space-based equipment, $24.7 billion for missile defense and $12.6 billion for combat ground vehicles and military tanks.

Stocks to Gain

Considering the aforementioned discussion, it is quite evident that U.S. defense stocks will gain substantially, particularly those whose products are being offered substantial funding in this proposal. We have discussed such stocks below.

Lockheed Martin: The DoD has asked for funding worth $11 billion to buy 61 F-35 Joint Strike Fighter jets, $2.6 billion for Ground-Based Midcourse (GMD) and Improved Homeland Defense/Next Generation Interceptors (NGI), $1 billion for Patriot Advanced Capability Missile Segment Enhancement and $335 million for Terminal High Altitude Area Defense (THAAD) ballistic missile defense.

Being the largest defense contractor in the United States, the investment proposal in its aforementioned products should boost LMT’s growth. Lockheed Martin currently has a long-term earnings growth estimate of 5.7%.

Boeing: Within the investment plan for aircraft, Boeing’s products have secured most of the funding proposals, apart from LMT. Notably, the DoD has requested investment worth $2.9 billion for purchasing 15 KC-46 tankers and $2.8 billion for 24 F-15EX jets.

Apart from being the largest commercial plane maker in the United States, BA enjoys a significant position in combat aerospace and the aforementioned allotment would help it maintain the same. Boeing currently has a long-term earnings growth estimate of 4%.

Northrop: The latest DoD budget proposes spending of $5 billion for B-21 Long Strike Bomber, $3.6 billion for Ground Based Strategic Deterrent (GBSD) and $1.7 billion for Next-generation Air Dominance (NGAD). Further, the $11 billion funding that has been allotted for procuring F-35 jets will boost NOC’s top line, with the company being a sub-contractor in the F-35 program.

Northrop currently has a long-term earnings growth estimate of 6.2%.

Further, prominent shipbuilders General Dynamics and Huntington Ingalls will gain considering the fact that they jointly build DDG-51 Class destroyer and Virginia class submarines, which have been allotted funds of $5.6 billion and $7.3 billion, respectively, in the fiscal 2023 budget.