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Lockheed, Boeing to Gain from $38B U.S.-Israel Defense Deal
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Following months of behind-the-curtains discussion, the U.S. has finally signed a landmark agreement with Israel, under which the later will receive military aid worth $38 billion in total over a period of 10 years. This deal represents 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. The existing deal will expire in 2018 and will be followed by the latest one, wherein Israel will get $3.8 billion every year from 2019 through 2028, effective Oct 1, 2018.
We note that the U.S. has been providing military assistance to Israel for a little less than a decade now, amounting to cumulative defense aid worth almost $24 billion.
How will the Deal Help the U.S. Defense Sector?
The memorandum of understanding (MOU) for the newly signed deal reveals that the terms and conditions have been structured such that the majority of the Israeli defense spending goes to U.S. companies.
For instance, under the new arrangement, Israel can utilize only 26.3% of the foreign military fund (FMF) it receives from the U.S. on home-grown defense products. On the other hand, Israel has to spend as much as $1.2 billion per year on the advanced military equipment that only the U.S. can provide.
Clearly, the deal aims to not only boost Israel’s military strength but to substantially improve the profits earned by defense majors in the U.S.
Which U.S. Companies will Benefit?
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 the latest U.S.-Israel deal. Under this deal, Israel will upgrade its fleet of fighter jets by acquiring a handful of Lockheed Martin’s F-35 fighter jets.
Using the newly assigned FMF, Israel will receive 33 F-35 jets, of which the first two will be delivered in Dec 2016 and the last one expected to be received around 2021. This will make Israel the first foreign partner to take delivery of this fifth-generation fighter aircraft, which incorporates advanced stealth, full-fused sensor information and network-enabled operations.
The deal also calls for the delivery of 10 Boeing F-15 aircraft to Israel. This twin-engine, all-weather superior fighter jet is considered the backbone of the U.S. Air Force.
Apart from these two fighter jets, constituting the lion’s share of the FMF, Israel will also receive several 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.
Our View
Note that Israel has to spend a major portion of its gross domestic-product (GDP) on defense equipment due to terrorist attacks across the country. Last year, the country’s military budget, excluding U.S. aid, comprised 5.4% of its GDP.
With no sign of improvement in this situation any time soon, we believe that the latest military deal will encourage Israel to spend more in defense missiles, aircraft and other equipment. This in turn should benefit U.S. defense majors particularly, Lockheed and Boeing, in the days ahead.
Stocks to Consider
Both Boeing and Lockheed currently carry a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the aerospace and defense sector include Engility Holdings, Inc. and Ducommun Inc. (DCO - Free Report) , both of which sport a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.
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Lockheed, Boeing to Gain from $38B U.S.-Israel Defense Deal
Following months of behind-the-curtains discussion, the U.S. has finally signed a landmark agreement with Israel, under which the later will receive military aid worth $38 billion in total over a period of 10 years. This deal represents 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. The existing deal will expire in 2018 and will be followed by the latest one, wherein Israel will get $3.8 billion every year from 2019 through 2028, effective Oct 1, 2018.
We note that the U.S. has been providing military assistance to Israel for a little less than a decade now, amounting to cumulative defense aid worth almost $24 billion.
How will the Deal Help the U.S. Defense Sector?
The memorandum of understanding (MOU) for the newly signed deal reveals that the terms and conditions have been structured such that the majority of the Israeli defense spending goes to U.S. companies.
For instance, under the new arrangement, Israel can utilize only 26.3% of the foreign military fund (FMF) it receives from the U.S. on home-grown defense products. On the other hand, Israel has to spend as much as $1.2 billion per year on the advanced military equipment that only the U.S. can provide.
Clearly, the deal aims to not only boost Israel’s military strength but to substantially improve the profits earned by defense majors in the U.S.
Which U.S. Companies will Benefit?
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 the latest U.S.-Israel deal. Under this deal, Israel will upgrade its fleet of fighter jets by acquiring a handful of Lockheed Martin’s F-35 fighter jets.
Using the newly assigned FMF, Israel will receive 33 F-35 jets, of which the first two will be delivered in Dec 2016 and the last one expected to be received around 2021. This will make Israel the first foreign partner to take delivery of this fifth-generation fighter aircraft, which incorporates advanced stealth, full-fused sensor information and network-enabled operations.
The deal also calls for the delivery of 10 Boeing F-15 aircraft to Israel. This twin-engine, all-weather superior fighter jet is considered the backbone of the U.S. Air Force.
Apart from these two fighter jets, constituting the lion’s share of the FMF, Israel will also receive several 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.
Our View
Note that Israel has to spend a major portion of its gross domestic-product (GDP) on defense equipment due to terrorist attacks across the country. Last year, the country’s military budget, excluding U.S. aid, comprised 5.4% of its GDP.
With no sign of improvement in this situation any time soon, we believe that the latest military deal will encourage Israel to spend more in defense missiles, aircraft and other equipment. This in turn should benefit U.S. defense majors particularly, Lockheed and Boeing, in the days ahead.
Stocks to Consider
Both Boeing and Lockheed currently carry a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the aerospace and defense sector include Engility Holdings, Inc. and Ducommun Inc. (DCO - Free Report) , both of which sport a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>