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I am currently the Manager of Public Information for a national security think tank in Washington DC. I perform extensive research on various national security issues faces by America. My work focuses on, but is not limited to, writing policy briefs, white papers, and opinion editorials, on... More
  • Defense Contractors Will Survive Budget Uncertainty 0 comments
    Apr 4, 2014 12:04 PM | about stocks: BA, LMT, NOC

    Since 2009, the Department of Defense has gone through repeated rounds of cuts and sequestration is forcing the military to find ways of meeting the security needs of our nation through increasingly limited resources. A quick look at recent headlines shows the consequences of America's decreased military presence.

    The current budget climate in the United States is proving uncertain. Compounded by increased aggression from foreign nations, defense contractors, such as Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC), have supplemented their earnings through international sales.

    Increased aggression between North and South Korea has spurred an increase in South Korean defense spending. South Korea recently ordered 40 F-35's for $6.8 billion, making itself the 10th nation to order the fighter jet. Additionally, Seoul has also reached a procurement deal with Northrup Grumman to secure Global Hawk unmanned aerial vehicles.

    The House Republicans recently released budget plan, which highlights defense as a top budgeting priority for the political party. Coupled with growing concern over various threats throughout the world, the future will hold more consensus between Congress and the President to increase defense spending (past sequestration cuts) in order to bolster an appearance of U.S. strength.

    Additionally, the Russian invasion of the Ukraine has incited fear throughout European countries. Growing tension between Russia and its neighbors will most likely lead to increased spending by various NATO nations in an attempt to bolster its strength. This may include speeding up the timetable of various anti-missile projects that have been proposed.

    The increased interest in Lockheed's F-35 fighter, along with $11.5 billion drop in acquisition costs, will most likely lead to higher demand from the U.S. and further increase the fighter's production. I am expecting a higher than expected earnings report this quarter from LMT.

    However, the growing demand for tactical fighters is spurring competition from companies such as Boeing (NYSE:BA). Boeing is currently pressing lawmakers to restore funding to the Navy's EA-18 Growler.

    It is very likely that Boeing will be able to restore the funding to the Growler program. In doing so, Boeing will be able to keep the production line of the Growler open for at least two more years. This will aid in BA's continued positive performance and ensure high dividend yields from the company for the foreseeable future.

    While there may be some uncertainty, regarding current defense spending levels, the future shows the defense industry to be a good long-term investment and high dividend payouts.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Themes: Defense Spending Stocks: BA, LMT, NOC
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