Defense contractors

[ratiman]

2020 defense budget was $738 billion, according to my Binging. 2023 defense budget will be less than $800 billion. That's a cut in inflation adjusted terms. I don't know how much but it's not a small cut. With Republicans turning against the military, and Democrats never that big on defense spending, I don't see how the defense budget keeps pace with inflation. Even if Russia were to invade Ukraine, I'm not sure it would affect the budget. These things go in cycles.

[Castanza]

https://asiatimes.com/2022/02/china-takes-rare-earth-aim-at-raytheon-and-lockheed/

 

 

[Spekulatius]

2 hours ago, Castanza said:

https://asiatimes.com/2022/02/china-takes-rare-earth-aim-at-raytheon-and-lockheed/

 

 

The sanction makes sure they don't hurt anybody. If they really wanted to hurt, they would sanction Airbus and Boeing, which both have a commercial airplane business in China.

 

The Chinese are basically saying - look we need to show off a bit for our people, but we make sure that nobody get's hurt.

Edited February 23, 2022 by Spekulatius

[Spekulatius]

Looks looks the new defense spending bill implies +5% for 2022 (less than inflation though) i do not know if this includes stuff related to Ukraine these incidentals are often is added in additional bills later.

https://www.airforcemag.com/congress-unveils-2022-spending-plan-boosting-pentagon-funding/#:~:text=All told%2C the 2022 Department,requested by the Biden administration.

 

This still needs to go through senate.

Edited March 11, 2022 by Spekulatius

[Spekulatius]

Despite Ukraine, the defense contractors earnings are nothing to write home about:

https://finance.yahoo.com/news/lockheed-lowers-2022-revenue-outlook-113815217.html

 

LHX is in the same boat. Ukraine turns out to be classic sell the news story (which i luckily did for the most part) for the defense stocks. FWEIW, my biggest winner in the defense basked was Rheinmetall (RHM.DE) but I sold it as well (~ 3 bagger).

[Xerxes]

^^^
 

I think both defence stocks and oil stocks have bullish secular trend with a front-loaded cyclical bull. 
 

so they will disappoint in the short term as that cyclical bull rolls over. But the underpinning secular trend is there. 

[Spekulatius]

Not so good news for defense contractors potentially:

 

I think LMT and BAESY has relatively significant business with Saudi Arabia.

(sold mine a while ago)

 

The foreign affair committee is bi-partisan:

https://foreignaffairs.house.gov/members

 

Peter Zeihan must be running victory laps recently.

[Xerxes]

BAE for sure. 

For LMT, unrelated to Saudi Arabia, it was already known that they would have flat y o y top line through 2025. The large stock repurchase program started in Q4 last year was largely there to take advantage of that. So that once the budget is in, you get that EPS torque with a lower share count. 
 

I don’t know what is Saudi exposure to its top line but should be small, given that for the longest time buying Lockheed stock meant investing in the F-35 franchise because of its outsize role in LMT business. 

[Xerxes]

B-21 roll out this Dec 2nd 

 

 

 

[Spekulatius]

@Xerxes is there a B21 unboxing event? If not's it's a missed opportunity. I like to see my tax $ at work.

 

[Xerxes]

This Friday, in a theatre near you.
 

unrelated there has been some very interesting development with Boeing that will have long term consequences in the commercial industry at large. I will post those on Boeing thread and related articles.  Quite interesting 

[Dinar]

4 hours ago, Xerxes said:

This Friday, in a theatre near you.
 

unrelated there has been some very interesting development with Boeing that will have long term consequences in the commercial industry at large. I will post those on Boeing thread and related articles.  Quite interesting 

Please do.

[Xerxes]

@Dinar @Spekulatius

 

B21 stealth bomber roll out live on YouTube 

 

https://youtu.be/WjfsANcgJAg

 

 

Edited December 3, 2022 by Xerxes

[Spekulatius]

30 minutes ago, Xerxes said:

@Dinar @Spekulatius

 

B21 stealth bomber roll out live on YouTube 

 

https://youtu.be/WjfsANcgJAg

 

 

Nice commercial. The chat has some funny comments:

 

“The demon has risen”

“Iran has left the chat”

Edited December 3, 2022 by Spekulatius

[Dinar]

48 minutes ago, Xerxes said:

@Dinar @Spekulatius

 

B21 stealth bomber roll out live on YouTube 

 

https://youtu.be/WjfsANcgJAg

 

 

Thank you.  I went to a memorial service today for a professor of mine https://en.wikipedia.org/wiki/Roy_Radner, I never knew he was a big pacifist and spent a lot of time trying to figure out how to induce the world to disarm.  

On a side note, there is a Russian saying - war writes off everything (meaning corruption in the military can magically disappear when war consumes non-existent stocks.)  

Where are you traveling these days?  

[Xerxes]

On 12/2/2022 at 9:03 PM, Dinar said:

Thank you.  I went to a memorial service today for a professor of mine https://en.wikipedia.org/wiki/Roy_Radner, I never knew he was a big pacifist and spent a lot of time trying to figure out how to induce the world to disarm.  

On a side note, there is a Russian saying - war writes off everything (meaning corruption in the military can magically disappear when war consumes non-existent stocks.)  

Where are you traveling these days?  

 

Heading to Portugal most likely in December.

 

Trying to get to Asia or Africa in 2023 ... in some ways, it is blessing to be so close to Europe (5-6 hr flight), but also a curse as its "gravitional pull" keeps pulling me away from going too much to Asia.

 

It took a pandamic to force me to go visit Vancouver in my own country, where people speak the same language as me, use the same currency as I do, have the same flag as I do, and where your cellphone data-plan works just fine as it is.

 

[Spekulatius]

There has been some decline in defense stocks in particular LHX which has two mergers pending (AJRD and a sateeite business) so i think it  ight be interesting again.

 

No position currently but it looks interesting from a LT perspective because the threats that may increase defense spending are still present. LHX is lower now than at the start of the Russian invasion, which doesn't seem right.

 

Just from a fundamental POV, the stocks including LHX don't look cheap yet.

Edited January 18, 2023 by Spekulatius

[Spekulatius]

I am liking LHX here again - added to my starter position around $180 here. the Aerodyne acquisition is a question mark (will it get approval) but fits into their space ambitions. this one has been a laggard due to lack of earning growth, but I think the valuation could be compelling if you believe that defense spending is going up on behalf of Chine/Russia.

 

I  think the reason for the weakness in this sector is fears round government shutdown / debt ceilings, which are likely abate at some point. I do regard the stocks in this sector as insurance against mushroom clouds.

Edited May 25, 2023 by Spekulatius

[dealraker]

Right there with you spek on LHX.

[Xerxes]

44 minutes ago, Spekulatius said:

I am liking LHX here again - added to my starter position around $180 here. the Aerodyne acquisition is a question mark (will it get approval) but fits into their space ambitions. this one has been a laggard due to lack of earning growth, but I think the valuation could be compelling if you believe that defense spending is going up on behalf of Chine/Russia.

 

I  think the reason for the weakness in this sector is fears round government shutdown / debt ceilings, which are likely abate at some point. I do regard the stocks in this sector as insurance against mushroom clouds.

the best insurance against mushroom cloud happening (small scale) is a bet on long-dated treasuries (collapsing yields)

 

the big defence contractors are a good bet if betting on “sustained” Cold War style Great Game power play in info-pacific region, without that Cold War turning into a hot war. That said the headwind that they have is managing fixed-price contract that they signed pre-inflation days. 

 

An actual large scale hot war, would mean a sustained bull market on artillery shells, munitions etc , I think short-cycle defense and metal-badgers. Ala Rheinmetal in Germany, SAAB etc not sure about long-cycle defense contractors. I think capital will re-allocate from their budget toward munition makers. 

[Spekulatius]

My cold war scenario does not have mushroom clouds, but LHX is a nice setup - got back to pre-invasion levels and I think earnings may be springloaded there. They have seen margin pressure supposedly from supply chain issues, but those should go away at some point. Book/Bill is 1.3 which tells you there is revenue potential.

[Spekulatius]

Adding to LHX here. Shares are back all the way to 2020 levels. Main culprit is margin pressure and perhaps the AJRD buyout, which adds debt . Their order book is pretty healthy . I think they can overcome the margin pressure and I can see them earning $17/ share in a few years.

Businesses is fairly capital light so most of the earnings go directly into FCF.

[dealraker]

+1 here on Spek/LHX.

[Spekulatius]

RTX update on engine issues:

https://finance.yahoo.com/news/rtx-provides-pratt-whitney-gtf-110000268.html

 

Not a small financial impact. i think I am going to add a little if this breaks $80.

[lnofeisone]

8 hours ago, Spekulatius said:

RTX update on engine issues:

https://finance.yahoo.com/news/rtx-provides-pratt-whitney-gtf-110000268.html

 

Not a small financial impact. i think I am going to add a little if this breaks $80.

i sold some puts here. For the size of the charge I hope management takes one and addresses all issues.