Aerorick

13 Defense and Aerospace Stocks to Consider

Defense stocks should be bought today if, and only if, the purchaser believes Republicans retain the White House in six weeks. The Democratic candidate will, much as the incumbent from 1992-2000, gut the military budget which has roughly doubled the past seven years, excluding war-fighting supplements which bring total spending even higher. Deterring an increasingly outrageously behaving natural resource-fortified Russia, and ambiguous but nonetheless very real Chinese military power, will require a further 40-50% spending increase in real dollars over 6 years to 5-6% of GDP from 4.5% today, bringing annual spending to $700-750 billion in 2014, imputing 8-10% compound growth in contractor revenues and 12-14% per share earnings. A Democratic administration will follow an internationalist agenda focused on multilateral institutions and reduce spending toward the 2-3% of GDP of the mid-late 1990s, when the party last held power, imputing 5%-8% annual reductions in contractor revenues and 10-15% lower earnings as the cutbacks will fall disproportionately on weaponry and services. P/Es that today are roughly market multiples will rapidly jump 30%, or more, if McCain wins, while the market will be slower to cast an Obama victory as negatively as our analysis casts, hence a protracted sell-off as reported fundamentals climb into 2010 from the last Bush budget (FY09). We believe the odds favor the bull case, so we continue to recommend purchase of leading aerospace/defense shares such as GD, NOC, LLL, RTN, BA, COL, CW, MOG/A, GR and PCP, but will have more to say on November 5th.