$190 Billion Request for the War Effort
During
September, the month Defense Secretary Robert Gates asked Congress for
nearly $190 billion to pay for the war effort in Iraq and Afghanistan.
This adds an additional $42 billion to the administration’s initial
request of $141.7 billion earlier this year. Of this amount, $11
billion would be used to pay for additional armored vehicles to protect
troops from roadside bombs.
Executive Comments from the Morgan Stanley Investor Conference
Raytheon
(
RTN) said it expects more sales to Middle East and Asia countries in
the next three years due to a stronger petrodollar and the perception
of a more intimidating China. According to CEO William Swanson, the
firm receives between 18% to 19% of its revenue from overseas sales but
this could climb to as much as 25% over the next 5 years. Swanson also
said that the upcoming U.S. military reset* will be a big number for
the company.
Northrop Grumman’s (NOC) COO
Wesley Bush says that they see “very, very strong support for a solid
defense budget" in both the Republican and Democrat parties. This is
driven by the perception that there is a growing number of external
threats and a need by DoD to improve the military's information
technology.
Are Rules for Export Restrictions Lightening?
The
U.S. and Australia have agreed to loosen restrictions on sales of U.S.
armaments to Australia. Once finalized, the treaty will allow
prescreened firms to export approved defense technology to Australia
without going through the current licensing process. Instead, the firms
will notify the State Department that the sale has taken place. The
treaty must still be approved by the Senate.
Defense
News in a recent article stated that defense contractors have long
chafed at the lengthy licensing process required to secure the right to
export military hardware and technology. According to Jeremiah Gertler,
vice president for defense and international affairs at the Aerospace
Industries Association, "the administration has welcomed suggestions
for change [and] there is openness to reform. The reality is that
companies in other countries are offering defense technologies to
interested parties around the world. The U.S. sees an advantage to
arming its allies and any efforts to reduce the cumbersome burden of
export licensing of military technology would be a boon to defense
companies.
Market Estimate - Commercial Aerospace
At
the Latin America Airfinance Conference in Rio de Janeiro, Boeing (
BA)
predicted that the region’s airlines will need 1,730 airplanes worth
$120 billion over the next 20 years as air travel in the region grows
roughly 6.6% above the world average of 5%. Over the next 20 years 80%
of planes delivered to the region will be single-aisle jets with 90
seats or more; planes with 200 to 400 seats are expected to make up
12%, and regional jets with fewer than 90 seats, 8%. Jumbo jets such as
the Boeing 747 or Airbus A380 will be less than 1%.
Industry
executives and analysts estimate the U.S. market is valued at upward of
$140 billion over the next five years. Foreign orders for equipment and
services ranging from border security to cargo screening equipment
could generate an additional $100 billion in sales in coming years. The
Bush administration's $61 billion homeland security request for FY-08
"effectively quadrupled" the $16 billion spending of FY-00. This amount
includes the budget for the Department of Homeland Security (
DHS) as
well as salaries for airport screeners and homeland defense spending by
the U.S. military. Purchases of hardware, software, and services are
picking up as priorities are established. Tim Josiah, Raytheon’s VPfor
homeland security stated that, "Raytheon absolutely sees homeland
security as a growth market, as an adjacent market to its principal
defense marketplace. We are five years into a pretty intensive focus on
this market area."
Support for NASA Remains Strong
The
September 10th Houston Chronicle stated that congressional support
remains strong even with NASA’s recent spate of bad publicity related
to its astronaut core. Capitol Hill proposed funding the agency at
levels exceeding the $17.3 billion requested by the White House with
the House approving a $17.8 billion this summer and the Senate
Appropriations Committee passing its version of NASA’s budget at $17.5
billion.
India a Top Market for Defense Contractors
Per
the New York Times, military analysts expect India to spend $40 billion
over the next five years on weapons procurement, making it one of the
largest military markets in the world. Historically, Russia has
supplied India’s military hardware. U.S. success in this market will
depend on political relations and building partnerships.
Infotech as Future Growth Area
Lockheed
Martin CEO, Robert Stevens, stated in September to the Wall Street
Journal that the firm is shifting more of its resources to information
technologies in an effort to diversify, support more of the federal
government, and keep ahead of a projected decline in defense spending
as the war in Iraq eventually winds down.
The
Air Force will be awarding a $40 billion contract for 179 refueling
tankers as early as December. The contract could be the first
installment of a deal for 500 planes worth up to $100 billion. As much
as $15 billion could be spent over five years through the contract to
provide equipment, material and services to DoD’s Counter-
Narcoterrorism Technology Program Office. The firms are: Arinc,
Lockheed Martin (
LMT), Raytheon (
RTN) Technical Services, Northrop
Grumman (
NOC) Information Technology and Blackwater.
Honeywell
(HON) will provide the major mechanical systems for Airbus' A350
aircraft including an auxiliary power unit and other equipment to
supply pneumatic and electric power for the aircraft while on the
ground or in flight, as well as environmental systems. Historically,
Airbus would have done this inhouse. The contract is worth more than
$16 billion over 20 to 25 years.
Raytheon
(RTN) won a nearly $1 billion Navy contract for engineering and
production work for the new DDG 1000 Zumwalt-class destroyer. The
contract had been widely anticipated since 2005, when Raytheon beat out
rival Lockheed Martin (LMT) to become the prime contractor for the
radar, sonar, communications,and electronics gear on the destroyer. It
was delayed while Raytheon continued to develop needed designs.
Boeing (BA) received a $1.1 billion contract for maintenance services for the KC-135 midair refueling tanker.
An
ITT (
ITT) -led team won a $1.8 billion FAA contract to start Air
Traffic Control System. The team, which includes, SAIC (
SAI) and
AT&T., will build the first portion of a new satellite-based air
traffic control system. The system will eventually replace the current
radar-based air traffic control, providing a safer and more efficient
way to guide planes through American airspace. ITT's contract should be
complete by 2013. The full upgrade will cost more than $15 billion and
take nearly 20 years to put in place.
Computer
Sciences Raytheon, a joint venture of Computer Sciences (CSC) and
Raytheon, won a $816.2 million DoD contract for space launch services.
The GAO rejected a protest by Raytheon allowing L-3 Communications
(LLL) to continue in its lead role in the $2 billion contract to
produce at least 78 C-27J Spartan propeller-driven aircraft.
ITT
(
ITT) agreed to acquire EDO Corp. for $1.4 billion in a deal that will
expand ITT's defense holdings. Both companies are constituents of the
SPADE Defense Index. ITT will pay $56 for each EDO share (an 8.7%
premium) and includes $120 million in debt and the anticipated
conversion of convertible notes.
Additions and Subtractions to Index
On
September 27, 2007, the SPADE Defense Index performed its quarterly
review. The additions and subtractions to the Index are as follows:
Additions:
GeoEye (NASDQ: GEOY): The company operates several satellites and
produces and distributes high-resolution imagery to the military,
intelligence community, and commercial customers. Ducommun (NYSE: DCO):
The company manufactures components for military and commercial
aircraft and space programs.
Subtractions:
DirecTV (NYSE: DTV) and Echostar (NASDQ: DISH) - Both companies have
invested billions in space systems which in turn helped to support the
military space industrial base that builds and launches satellites for
government customers. With the bulk of their space infrastructure
development complete and in orbit, this segment of the commercial space
sector does not have enough overlap with the defense and homeland
security market to justify its continued inclusion. The Index continues
to have high exposure in the area of space with 17 of the 20 largest
firms in the Index maintaining space operations and capabilities.