Secretary of Defense nominee James Mattis said at today's Senate confirmation hearing that Lockheed Martin's (LMT -0.9%) F-35 stealth fighter is vital for the U.S. and its allies.
Pres.-elect Trump has been a persistent critic of the F-35, and ripped the program yesterday for being behind schedule and over budget, but Mattis said Trump has "in no way shown any lack of support" for the F-35 but just wants "bang for his buck."
Mattis also suggested that human pilots fly Northrop Grumman's (NOC -1%) forthcoming B-21 bomber, which has been criticized by Senate Armed Services Chairman McCain for not being more transparent on its total acquisition costs.
He voiced support for the recapitalization of U.S. nuclear assets, including the Columbia-class ballistic-missile submarine, for which General Dynamics (GD -0.2%) is the prime contractor; Mattis is a GD shareholder but says he is resigning from GD's board and selling his GD stock, and would recuse himself from matters related to GD for one year.
Boeing’s (NYSE:BA) market position is inferior as it is shut out of next generation fighter and bomber platforms, RBC analyst Matthew McConnell says as he initiates coverage on U.S. aerospace and defense.
Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC) are relatively better positioned based on their marquee programs, McConnell says.
RBC rates BA at Underperform with a $136 price target; NOC, GD, RTN, TDG, CSRA and TGI are rated Outperform, while LMT, UTX, COL and LLL are Sector Perform.
The United States again ranked first in global weapons sales last year, signing deals for about $40B, although the total size of the worldwide arms bazaar dropped to around $80B in 2015 from $89B a year earlier.
The study, "Conventional Arms Transfers to Developing Nations, 2008-2015," was prepared by the nonpartisan Congressional Research Service, a division of the Library of Congress.
The decision reflects anger within the Obama administration over Saudi Arabia's practices in the 20-month-old war, which has killed more than 10K people in Yemen and sparked humanitarian crises including chronic food shortages.
Details are lacking, but a specific case put on hold appears to involve the sale of hundreds of millions of dollars worth of guidance systems manufactured by Raytheon (RTN -0.7%), according to the report.
Other big defense company stocks are mostly lower lower: NOC -0.2%, GD +0.2%, LMT -0.7%, BA -0.9%.
Pres.-elect Trump's broadside (I, II) against the Pentagon’s most expensive weapons system isn't just slamming Lockheed Martin (LMT -3.4%); nearly every major defense contractor except Boeing has exposure to the F-35 fighter jet program.
Northrop Grumann (NOC -3.8%), a major supplier to the F-35, is suffering comparable losses, and suppliers United Technologies (UTX -0.1%) and BAE Systems (OTCPK:BAESY -1.5%) also are lower.
"Trump has clearly learned that bully pulpit of Twitter can be pretty powerful," says Cowen defense stock analyst Cai von Rumoh. "Defense is in essence a political business, so if the president or president-elect says you're asking too much money, people worry."
But investors should not panic over F-35’s prospects based on a single Trump tweet, says Byron Callan, a defense analyst at Capital Alpha: “Stating that costs are ‘out of control’ is wrong. Yes, there are affordability issues on the F-35 and there may be alternative ways to deliver capabilities offered by the F-35 through other platforms or weapons. However, unit prices have been declining, and the program has stabilized in recent years.”
Shares of defense giants Lockheed Martin (NYSE:LMT), Northrop Grumann (NYSE:NOC), Raytheon (NYSE:RTN) and General Dynamics (NYSE:GD) slipped in today's trade, giving back a bit of the group's strong gains enjoyed since election day: LMT -2.7%, NOC -3.8%, RTN -1.8%, GD -2.6%.
Cowen analysts warn that while Pres.-elect Trump's Air Force One criticism likely will not hurt Boeing, his habit of using Twitter as a bully pulpit could pose a bigger risk for LMT and NOC, which have big-ticket defense contracts.
"This is in line with his campaign comment that he wants to boost defense spending but feels DoD could 'buy smarter,'" Cowen says. "Presumably he won't comment on all defense contracts but will focus on high profile programs. However, given his power as president, this can have an impact on specific programs."
LMT's F-35 program has long been criticized for its $400B development and acquisition price tag, and NOC's B-21 bomber recently has been hit for not disclosing a fuller estimate on its cost, which analysts estimate at $50B-$80B.
Northrop Grumman (NOC -2.4%) has elected General Mark Welsh to its board.
Welsh, who was the Air Force's chief of staff last year when it gave Northrop a coveted contract for a new long-range strike bomber, is currently Dean of the Bush School of Government and Public Service at Texas A&M University.
With the addition of Welsh, Northrop's board increases to 14 members, 13 of whom are independent directors.
President Obama is poised to block a Chinese company from buying Germany's Aixtron (NASDAQ:AIXG) because Northrop Grumman (NYSE:NOC), a major U.S. defense contractor, is among the chip equipment maker's customers.
It would mark only the third time in more than a quarter century that the White House rejected an investment by an overseas buyer as a national security risk.
The EU plans to boost its defense budget to its highest level in over a decade, setting up a €5B fund and sending a signal to Donald Trump that it intends to pay for its own security.
"This is not about an EU army, this is not about spending on the military instead of social security," European Commission Vice President Jyrki Katainen said. "We face multiplying threats and we must act."
Northrop Grumman’s (NOC -0.6%) program to develop an upgraded, cyber-hardened network for major air operations has nearly doubled in cost and a key deadline has slipped by more than three years, the U.S. Air Force says.
The network's development phase is now estimated to cost $745M, up from $374M originally, according to a report submitted to Congress last week and seen by Bloomberg; including procurement and support, the system has a projected $2.98B price tag.
The air operations network “is essential to national security,” the report says, and must be modernized “to address today’s evolving cyber environment,” command-and-control mission changes “and accelerating technological advancements."
Northrop Grumman (NYSE:NOC) and L-3 Communications (NYSE:LLL) are upgraded to Overweight from Equal Weight, and Lockheed Martin (NYSE:LMT) is upgraded to Equal Weight from Underweight at Barclays, as the Trump victory arguably gives new life to a bullish trade that's now less based on safe-haven status and more on absolute vs. relative growth.
Details on budget and national security changes under Trump are scarce, but Barclays believes the market will assign a 100% probability to the prospect of higher defense budgets in the near future; for defense stocks, the near term is not about fundamentals or estimate revisions per se - which the firm thinks will not change much - but instead about the simplistic view that defense spending under Trump will be higher.
Also, the firm shifts its neutral posture on defense to positive, on the belief that shares stay well bid in short-to-medium term.