Aerospace and Defense Update: 'The Bears Are Going to be Wrong'

War Could Cost $2.4 Trillion

OK. I don’t believe this figure either, however, according to the Congressional Budget Office the wars in Iraq and Afghanistan have already cost the U.S. $602 billion. If you take their assumption that U.S. personnel deployed in the regions will decrease from today’s 200,000 level to a continued presence of 75,000 from 2013 to 2017 and then factor in interest payments on “borrowed money” you come up with $2.4 trillion by 2017. If you assume 30,000 soldiers and exclude interest costs the cost drops to $1.2 trillion -- still double what has already been spent but definitely a more believable (and politically acceptable) figure. President Bush has requested $196.4 billion to cover war costs during 2008.

Army Preparing For Up to 15 More Years of War

Citing a top Army General, Defense News in early October reported that U.S. Army leaders are preparing for up to 10 to 15 more years or wars and have an emerging “persistent conflict” doctrine that is already changing strategy and procurement plans. Lt Gen. Michael Vane, director of the Army Capabilities Integration Center for the Training and Doctrine Command [TRADOC] stated that they “see protracted confrontations by state and nonstate actors that are fueled by expanding Islamic extremism, competition for energy, the whole business of globalization, the climate and demographic changes that you see occurring, and the increasing use of violence to achieve political and ideological outcomes by these states and nonstate actors”.

Supplemental Spending

Wonder what’s on the U.S. military shopping list? The top 10 categories receiving the most funds in the the $196.4 billion war funding request are:

• 28.0% - $54.9 B - Army ops/maintenance
• 6.3% - $12.3 B - Army personnel
• 5.6% - $11.0 B - MRAP vehicles
• 5.5% - $10.8 B - Air Force ops/maintenance
• 5.0% - $ 9.9 B - Aircraft - AF/Army/Navy
• 3.7% - $ 7.3 B - Army weapons, vehicles
• 3.2% - $ 6.4 B - Defense-wide operations and maintenance
• 3.2% - $ 6.3 B - Navy ops/maintenance
• 2.8% - $ 5.5 B - Marine Corps equipment
• 2.4% - $ 4.7B - Marine Corps operations and maintenance
• 2.2% - $ 4.3B - IED detection

NASA Gets Another Billion?

Although the Senate has proposed increasing NASA’s budget by an additional billion, its passage is not guaranteed. The extra money could be vetoed as the Congress looks for potential cuts to offer in its showdown with President Bush over the FY-2008 budget which is more than Bush states he is willing to sign.

The Bears Are Going to Be Wrong

Like him or call him a showman, Jim Cramer, CNBC has a big following, so when he says something about investing in aerospace and defense, well, I tend to listen from my desk. On 30Oct07 he came on the air for his 2:45 pm commentary and stated that he believed that , ‘the bears are going to be wrong on aerospace’.

ITAR Defense Export Reform

After six years, the stars are aligning among DoD, the Dep’t of State, the White House, and the Dep’t of Commerce for ITAR export reform. As John Douglas, former CEO of the Aerospace Industries Association stated, “It has always been a fact that we waste an enormous amount of time and energy controlling nuts, bolts, screws, silly things that are widely available all over the world.” In related news, Australia is being rewarded with a treaty that make defense trade between our two countries easier. Britain signed a similar treaty in June. As has been said before, changes to ITAR would be a big positive for defense firms and increase the overall market for exports.

Merger and Acquisitions

Index constituent, United Industrial (UIC), received a buyout offer from Textron for $1.1 billion. Textron looks at the deal as a way to further expand into the defense market including unmanned aircraft. CACI bought private company, Athena Innovative Solutions, whose 600 employees are 95% cleared for at least top-secret. The acquisition will add an expected $110 million in revenue.

News That Caught Our Eye

Boeing’s (BA) board authorized a $7 billion stock repurchase (American City Business Journals) The U.S. Air Force is requesting new bids for a $10 billion contract for search and rescue helicopters. The contract was originally awarded to Boeing last November but Lockheed Martin (LMT) and United Technologies (UTX) successfully protested the decision (Wall Street Journal).

Northrop Grumman (NOC) was named the lead contractor on a $220 million Dep’t of Defense contract to develop an information management and data storage systems that will provide uniform access to intelligence data.

The fiscal 2009 DoD budget is not anticipated to include funds for the USAF to buy any F-22 Raptors or C-17 cargo lifters according to a report in Defense News citing ‘internal Pentagon budget discussions’. Lockheed manufactures the first (due to be replaced by the F-35 JSF, also a Lockheed plane) and Boeing the C-17.

In related news, the St. Louis Post Dispatch stated that Boeing has decided to continue funding production of the C-17 military cargo plane with in-house fund until the government decides how many aircraft it needs.

October 30th saw a Wall Street Journal article citing how Alliant Techsystems has become NASA’s 6th largest contractor as it receives contracts to develop large portions of the proposed Ares rocket that will replace the Space Shuttle as NASA’s primary launch vehicle.

International Deals

Israel has proposed to purchase $1.3 Billion worth of missiles, munitions and other military equipment from the U.S. The deal requires Congressional approval.

The United Kingdom has proposed purchasing 140 Force Protection armored vehicles (News & Observer)

Congress and the Pentagon are keeping a close eye on any cross-border investment and/or acquisition deals. The recent proposed buyout of electronics firm 3Com is receiving scrutiny from the House Foreign Affairs Committee among others as China’s Huawei Technologies would gain a 16.5% stake in 3Com. The Washington Post stated that Huawei has ties to the Chinese army and intelligence services.

Homeland Security Contracts

General Dynamics (GD) was awarded a $71.4 million over 5 year task order to provide information management services to support the agency’s Office of Intelligence and Analysis.

Raytheon and Cisco Systems (CSCO) are developing a wide-area communications network for emergency responders and military personnel integrating cell phones, hand-held radios and computers.

SAIC won a $33 million contract from the Department of Homeland Security to provide its VACIS P7500 X-ray inspection system to scan containers for weapons, explosives, and other materials at U.S. borders. The system produces a digital image and can scan up to 150 containers per hour.

Technology

The U.S. military is looking to have one in three ground combat vehicles driverless by 2015. The Globe and Mail of Toronto cited Oshkosh Truck’s TerraMaz as a vehicle being showcased in a DARPA-sponsored competition.

The FAA issued a Notice of Proposed Rulemaking that would require all aircraft operating in controlled airspace to make use of satellite-based avionics by 2020.

The Air Force posted a notice seeking suppliers capable of developing high-power microwave technologies for future military applications including UAVs, bombs, and cruise missiles. Targeted microwaves can disable or destroy electronic systems found in today’s military gear.

More Notes on Third Quarter Results

Lockheed Martin

In its 3Q07 statement the firm stated that it had its largest quarterly gain in sales since 2004 as it posted strong sales in fighter jets and satellites. Overall, sales for F-16 and F-35 were up 12% to $3.34B and sales for its IT and services were up 24% to $2.71B For 2008, Lockheed project earnings per share of $6.95 to $7.15 vs. analysts $7.23/share indicating that 2008 will see a slowdown in F-16 and F-22 production with the dip temporary as F-25 program ramps up.

FLIR Systems (FLIR)

Reported a 43% increase in sales, plans to acquire a small company, and a split in the stock. Upon the announcement, investors bid up the stock by $8.70, nearly 15%, to an all-time high of $67.62.

Mercury Computer (MRCY)

Reported better than anticipated results and saw its stock ‘surge’. What else could one call it when a company’s stock gains 52.14% in a single month?

Comments

[Patric06:]

What is the F-25???

2007 Dec 24 04:03 PM