The Congress writes the budget and not the president. Donald Trump’s budget blueprint, however, does reveal his priorities. The budget plan, released last week, will cut funding from most federal agencies to bolster the Department of Defense, Homeland Security and Veterans Affairs.
The plan named “America First: A Budget Blueprint to Make America Great Again” would increase defense spending by $54 billion. While his team is preparing to create an infrastructure “task force” that will help carry out the ambitious federal spending program, Trump is also expected to put immense pressure on NATO member nations to step up defensive outlays. This calls for investing in sound defense stocks.
But, before we indulge in such stocks, here is a breakdown of the winners and losers in Trump’s inaugural budget outline:
Trump’s “America First” Budget
The Trump administration took the first step in achieving its vision by proposing a budget that will make deep cuts into domestic programs. Most eye catching is a 31% proposed cut to the Environmental Protection Agency, trimming 50 programs and 3,200 jobs. Under his proposal, the Department of State will see its funding fall 28%. The budget eradicates the Global Climate Change Initiative and terminates payments to United Nations’ climate change programs.
The Department of Health and Human Services would lose 16%, with most of the cuts from two areas – the National Institute of Health and the Office of Community Services. The Department of Education will also stand to lose 14%, eliminating numerous grants and programs, but, safeguarding the Pell Grant program.
Not all departments, however, will suffer. His budget proposal that covers $1.1 trillion of discretionary spending, requests hikes for three agencies – Defense, Homeland Security and Veterans Affairs.
The blueprint insists additional $52 billion for the Department of Defense and $2 billion more to other defense programs “in a repeal of defense sequestration.” Trump seeks such a hike in spending on tanks, ships and weapon systems, while cyber security is significantly highlighted as a major area to improve, since U.S. is intended to build a “more lethal joint force”.
The defense bonanza also addresses warfighting readiness and deficits in ammunitions, personnel and maintenance. Trump said that such a funding will boost efforts to “strike ISIS targets, support our partners … disrupt ISIS’s external operations, and cut off its financing”.
At least $2.6 billion, in the meantime, will be spent on the construction of a wall on the Mexican border and other border enforcement priorities, a project which will eventually cost around $22 billion. An additional $1.5 billion is to be provided to increase detention and remove illegal immigrants.
About $314 million will be spent to recruit, hire and train 500 Border Patrol Agents and 1,000 Immigration and Customs Enforcement personnel, while $15 million will be used in nationwide implementation of the E-Verify system. Such a system allows businesses to determine the eligibility of their employees to work in the U.S.
The Department of Veterans Affairs (VA) mostly provides healthcare and a wide variety of benefits to military veterans and survivors. Representing such a key area, the budget increases discretionary funding for Veterans Affairs health care by $4.6 billion to improve medical care services for more than nine million enrolled veterans.
This funding will also focus on IT advancements to improve efficiency and will provide support for VA programs that serve homeless and at-risk veterans.
Comparing Previous Presidents’ Budgets
Trump’s proposed defense funding is about twice as big as those put forward by two of his predecessors. While Obama said that the financial crisis is “rooted in past mistakes”, Bush called for a “compassionate, responsible and courageous policy”. Unlike them, Trump’s message like his budget focused more on military strength.
In his budget message, Trump wrote that “in these dangerous times, this public safety and national security Budget Blueprint is a message to the world — a message of American strength, security and resolve”. He added that “this Budget Blueprint follows through on my promise to focus on keeping Americans safe, keeping terrorists out of our country and putting violent offenders behind bars”.
Budget to Boost Defense & Related Firms: 5 Solid Picks
Defense stocks have been rallying since the election on hopes of a big boost in military spending. With the Budget blueprint also confirming that the administration calls for urgent war readiness, surely defense stocks will further move north. For this reason, investors should adopt a bullish stance on such stocks.
We have, thus, selected five defense related stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). Given current valuations, investors could also benefit from exposure to defense firms.
Huntington Ingalls Industries, Inc. (HII - Free Report) engages in designing, building, overhauling and repairing of ships in the U.S. The company has a Zacks Rank #1. From a valuation standpoint, Huntington Ingalls has price/earnings to growth ratio (PEG) of 1.24, below the industry’s 1.34, implying that the stock is quite a bargain.
The company’s expected growth rate for the current year is 11.1%, way higher than the Aerospace - Defense industry’s estimated increase of 1.8%. Huntington Ingalls outperformed the industry on a year-to-date basis (+16.1% vs. +10.7%).
Embraer SA (ERJ - Free Report) is a Brazil-based company but also has facilities in the U.S. This company produces aircraft defense and security purposes and related services. Embraer has a Zacks Rank #2. From a valuation perspective, the company’s PEG ratio is 0.93, compared to the industry’s 1.34.
The company’s expected growth rate for the current year is 17.1%, way higher than the Aerospace - Defense industry’s projected increase of 1.8%. Embraer outperformed the industry on a year-to-date basis (+23.5% vs. +10.7%).
HEICO Corporation (HEI - Free Report) designs, manufactures and sells aerospace, defense, and electronic related products and services in the U.S. and internationally. The company has a Zacks Rank #2. From a valuation viewpoint, HEICO has a PEG ratio of 3.83, compared with the industry’s 5.72.
The company’s expected growth rate for the current year is 9.8%, way more than the Aerospace - Defense Equipment industry’s estimated increase of 1.5%. HEICO outperformed the industry on a year-to-date basis (+13.7% vs. +6.1%).
Kratos Defense & Security Solutions, Inc. (KTOS - Free Report) serves national security related agencies, the department of defense, intelligence agencies, and classified agencies. The company provides mission critical products, solutions, and services in the U.S. Kratos has a Zacks Rank #2. From a valuation standpoint, Kratos’ PEG ratio lags the industry average.
The company’s expected growth rate for the current year is 104.4%, way higher than the Aerospace - Defense Equipment industry’s estimated increase. Kratos outperformed the industry on a year-to-date basis (+11.5% vs. +6.1%).
TransDigm Group Incorporated (TDG - Free Report) produces and supplies aircraft components in the U.S. The company has a Zacks Rank #2. From a valuation viewpoint, TransDigm has PEG ratio of 1.68, compared with 5.72 for the industry.
TransDigm Group’sexpected growth rate for the current year is 6.3%, higher than the Aerospace - Defense Equipment industry’s projected increase. You can see the complete list of today’s Zacks #1 Rank stocks here.
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