Defense contractors

[Spekulatius]

Always curious how these downgrades work. Seems to be based more based on pure momentum than anything else. This time $CACI:

 

Edited December 12, 2024 by Spekulatius

[lnofeisone]

5 hours ago, Spekulatius said:

Always curious how these downgrades work. Seems to be based more based on pure momentum than anything else. This time $CACI:

 

I, too, wonder how these downgrades work. CACI is probably the more interesting play here because roughly 30% of their revenue is up for re-compete in the next 2 years + some major deals are coming down the pipeline where they dominate. I doubt GS tracks it that close but who knows.  

[Spekulatius]

Bought a few shares of Thales, the French aviation electronics/ defense and security company. Looks quite cheap here ~13x earnings with good visibility for growth the next few years.

 

The stock came down due to the investigation announced in November 11/20 which sounds like it could be an export control violation, but hard to know.

Edited January 6 by Spekulatius

[rogermunibond]

Lockheed Martin down 19%

GD down 14%

NOC down 9%

LHX down 20%

RTX is the only major defense contractor that's bucked the trend.

 

Anyone think that DOGE brings these down even more?  Once Elon starts digging into the DoD budget.

Edited February 7 by rogermunibond

[formthirteen]

17 minutes ago, rogermunibond said:

 

Anyone think that DOGE brings these down even more? 

 

Definitely possible if someone at the Pentagon takes a look at what is happening in Ukraine and puts 2 and 2 together.

 

Anduril was founded eight years ago and is innovating more than all of those companies together:

https://en.wikipedia.org/wiki/Anduril_Industries

 

Edited February 7 by formthirteen

[lnofeisone]

11 minutes ago, formthirteen said:

 

Definitely possible if someone at the Pentagon takes a look at what is happening in Ukraine and puts 2 and 2 together.

 

Anduril was founded eight years ago and is innovating more than all of those companies together:

https://en.wikipedia.org/wiki/Anduril_Industries

 

Full disclosure - I have Andrul shares. Anduril is a great product company in the mold of SpaceX and they are great at marketing. While they purport themselves as product builders trying to build ahead of what the military wants, it's primarily exaggerations. They shape and hustle with the generals/admirals like the rest of the military complex industry. They solicit pilots to be funded by the Gov't. They differ because they try to drive to fixed-priced contracts instead of the huge time and materials that the likes of LMT like. 

[sleepydragon]

12 minutes ago, lnofeisone said:

Full disclosure - I have Andrul shares. Anduril is a great product company in the mold of SpaceX and they are great at marketing. While they purport themselves as product builders trying to build ahead of what the military wants, it's primarily exaggerations. They shape and hustle with the generals/admirals like the rest of the military complex industry. They solicit pilots to be funded by the Gov't. They differ because they try to drive to fixed-priced contracts instead of the huge time and materials that the likes of LMT like. 

how do we get Anduril shares? Is it trading somewhere?

 

[cubsfan]

1 hour ago, rogermunibond said:

Lockheed Martin down 19%

GD down 14%

NOC down 9%

LHX down 20%

RTX is the only major defense contractor that's bucked the trend.

 

Anyone think that DOGE brings these down even more?  Once Elon starts digging into the DoD budget.

 

DOGE may have some impact. 

 

But I think you are also seeing this administration views expenses on defense differently.

 

They will prefer less large expensive weapons systems (carriers, large ships, etc) - in favor of smaller more nimble & innovative solutions - drones, unmanned technology, etc.

 

So you have a double whammy going on here.

Edited February 7 by cubsfan

[lnofeisone]

10 minutes ago, sleepydragon said:

how do we get Anduril shares? Is it trading somewhere?

 

I was part of the fund that invested in the latest (F) round. 

[Spekulatius]

Battleships don’t exist any more inactive duty, none were build since WW2.

The US Navy is going to need a lot of ships to counter China which is building a lot of ships.

[Dalal.Holdings]

Not sure about this sector...defense seems to be ripe for disruption. Looking to invest in tomorrow's winners over yesterday's winners

[cubsfan]

Just now, Dalal.Holdings said:

Not sure about this sector...defense seems to be ripe for disruption. Looking to invest in tomorrow's winners over yesterday's winners

 

Absolutely. 

[73 Reds]

7 minutes ago, Dalal.Holdings said:

Not sure about this sector...defense seems to be ripe for disruption. Looking to invest in tomorrow's winners over yesterday's winners

Yep.  Or maybe AAPL or TSLA just to name two as defense stocks.

[rogermunibond]

15 minutes ago, Spekulatius said:

Battleships don’t exist any more inactive duty, none were build since WW2.

The US Navy is going to need a lot of ships to counter China which is building a lot of ships.

 

Hypersonic missile make short work of surface vessels.

[fareastwarriors]

2 hours ago, lnofeisone said:

Full disclosure - I have Andrul shares. Anduril is a great product company in the mold of SpaceX and they are great at marketing

 

Congrats! Valuation just doubled....

 

Anduril in talks to raise money at $28 billion valuation as defense-tech booms

 

• Defense-tech startup Anduril has signed a term sheet to raise up to $2.5 billion at a valuation of $28 billion, according to sources close to the company.
• The company was valued at $14 billion in August.

[Spekulatius]

1 hour ago, rogermunibond said:

 

Hypersonic missile make short work of surface vessels.

Not necessarily. I think a carrier group has the means to defend itself against hypersonic missiles but it does become a number game.

[Gamecock-YT]

6 hours ago, rogermunibond said:

Lockheed Martin down 19%

GD down 14%

NOC down 9%

LHX down 20%

RTX is the only major defense contractor that's bucked the trend.

 

Anyone think that DOGE brings these down even more?  Once Elon starts digging into the DoD budget.

 

I'm surprised TDG has held up as long as it has, you'd figure lots of meat on that bone to trim.

[Dinar]

46 minutes ago, Gamecock-YT said:

 

I'm surprised TDG has held up as long as it has, you'd figure lots of meat on that bone to trim.

Why are you surprised?  Do you know what % of their revenues and profits come from DOE?

[Gamecock-YT]

45 minutes ago, Dinar said:

Why are you surprised?  Do you know what % of their revenues and profits come from DOE?

 

Not sure what DOE refers to? The Department of Energy? For DoD revenue it's what? 35-40%? Do they break out their profit by entity? Pretty sure it's just OEM/Aftermarket.

[Dinar]

3 minutes ago, Gamecock-YT said:

 

Not sure what DOE refers to? The Department of Energy? For DoD revenue it's what? 35-40%? Do they break out their profit by entity? Pretty sure it's just OEM/Aftermarket.

So, the 10-K gives two interesting points: a) defense is roughly 33% of their revenues; b) no single customer accounts for more than 10% of revenues.  So unless they are saying that if a part is ordered by LMT for a US gov't defense order counts as a LMT and not US Gov't, then it seems that US government cannot be more than 10% of revenues.  

In addition, one would logically expect that commercial business will grow much faster than the defense business (forecasts call for civilian passenger growth of 4% per annum globally for several decades.)

Edited February 8 by Dinar

[dealraker]

Here comes Elon evidently as per reviewing Pentagon spending.  Depending on the gain potential for him and his obsession for notoriety this sector could get wild as hell.  Or the red tape of change could literally bore the hell out of him and he just breaks a few rules, disrupts, and departs.  Anything is possible.  

[shhughes1116]

16 hours ago, rogermunibond said:

 

Hypersonic missile make short work of surface vessels.

The combination of AEGIS and E-2 Hawkeyes make it almost impossible for someone to get close enough, undetected, to launch a salvo of hypersonic missiles.  
 

But let’s assume they are launched.  Carrier group changes direction to increase distance and speed between the missiles.  CAP aircraft get the first shots.  The CG’s destroyer group gets the second shot with SM-3 and SM-6, and each destroyer has about 85-95 vertical launch cells.  And if by some miracle the hypersonic missiles get past that, multiple Phalanx CIWS get a shot (likely with some debris damage to the flight deck if they successful hit the hypersonic missile).

 

and all this assumes the enemy kill chain is fast enough to get hypersonic missiles into the air and headed to the right place where the carrier is.  The Chinese make this look super easy when they repeatedly hit their aircraft carrier mock-up in the desert that does not move and does not fight back.  
 

if you are basing your assessment on the British destroyers in the falklands and their experience with Exocet missiles, you may wish to read about all the mistakes they made leading up to that point - mistakes that are unlikely to be repeated by a carrier group. 

[shhughes1116]

16 minutes ago, shhughes1116 said:

The combination of AEGIS and E-2 Hawkeyes make it almost impossible for someone to get close enough, undetected, to launch a salvo of hypersonic missiles.  
 

But let’s assume they are launched.  Carrier group changes direction to increase distance and speed between the missiles.  CAP aircraft get the first shots.  The CG’s destroyer group gets the second shot with SM-3 and SM-6, and each destroyer has about 85-95 vertical launch cells.  And if by some miracle the hypersonic missiles get past that, multiple Phalanx CIWS get a shot (likely with some debris damage to the flight deck if they successful hit the hypersonic missile).

 

and all this assumes the enemy kill chain is fast enough to get hypersonic missiles into the air and headed to the right place where the carrier is.  The Chinese make this look super easy when they repeatedly hit their aircraft carrier mock-up in the desert that does not move and does not fight back.  
 

if you are basing your assessment on the British destroyers in the falklands and their experience with Exocet missiles, you may wish to read about all the mistakes they made leading up to that point - mistakes that are unlikely to be repeated by a carrier group. 

I think there is a compelling investment case for high-powered lasers (CIWS, replacement for Phalanx) and missiles.  The events in the Red Sea suggest that 85-95 VLS on destroyers are not enough and so we are likely to see ships equipped with larger volumes of missiles, along with lasers.  I think we will see a similar evolution on land (more robust EW, high-powered lasers for close-in defense, and larger volumes of small missiles).  

[Spekulatius]

Lasers that enough to destroy an hypersonic missile are bulky and need a huge power plant to operate. They are also hard to maintain. Just a tiny spec of bird poop on the laser exit window will lead to an epic meltdown. Distance limits are another issue as the laser beam needs to be focused or stay focused and that isn’t easy over long ranges. I think kinetic weapons have better prospects . Remember that the hypersonic missiles comes towards you, so your projectile can be much slower as long as it intercepts.

[Xerxes]

 

General Dynamics had G800 certification were in focus this quarter; not a reason for it being down but a factor. The submarine shipyards, if anything is constrained in the next years between commitment made to AUKUS and delivery profile for its main customer. Not sure what DOGE is going to do there. Metal bashing needs metal bashing.

 

Comments on conference call: 

 

Phebe Novakovic

So taking the inverse order, some of -- we have worked out with our suppliers some consideration and -- but not anything that I think is too material. But let's talk about the 800. So we expect the 800 certification sometime in the first half. And -- and we think we have worked our way through the most significant problems on the 7 -- that we experienced on the 700. Remember the commonality of part almost identical between the 800 and the 700. So we think the learning that we achieved on the 700 will be very advantageous on the 800. And our objective here is to deliver a fewer -- have expectations to deliver fewer 800s. So think of -- than we did 700. So think about it this way. For 2025, we're thinking about a combination of G650s and 800s. It's about equal to give or take, a few airplanes, the number of G650s we delivered. So we think a lot of the challenges are behind us.

 

Lockheed Martin had a (unplanned)charges on two of its black program (i.e. classified); not the first time there is an accounting charge. There was another couple of years ago. Don't expect this to be a recurring charges like KC46 tanker program at Boeing. I believe (w/ no evidence) that at some point Lockheed would need to get back to the commercial market. They took a step in diversifying their portfolio when they bought Sikorsky from UTC for $9B, but there is a lot of defense exposure there as well. Perhaps they could make a bid for the family-owned Canadian Bombardier Aerospace, and go toe to toe with General Dynamics.

 

It was widely reported in late 2024 that ULA is also on the block. Not sure who will buy that, or if Lockheed will double down (surely a mistake) and buy Boeing's 50% stake. All speculation. 

 

Comments on conference call: 

Jay and Maria will cover the financials in more detail. but I'd like to briefly comment on the earnings impact in the fourth quarter of 2 classified programs at MFC and Aeronautics, respectively. Recording charges in Q4 on these two programs enabled us to derisk the financial profile of both these critical national security programs going forward as we move into their next phases. While these particular contracts were struck a number of years ago, there are no longer any must-win competitions. Under today's Lockheed Martin wide bid process, every proposal adheres to a stringent, risk-adjusted ROI regime. This process is designed to compete aggressively for key opportunities, while also being very committed to achieving positive results, both in the short and long term for our shareholders.

 

----

For purposes of understanding the total impact on our full year results, I'll direct your attention to the middle section of the chart. We recorded net charges of $1.8 billion as follows. $1.4 billion related to the remaining expected future losses on the MFC classified program, and $555 million associated with the Aeronautics classified program. With these amounts partially offset by $155 million benefit associated with our C5 claim resolution.

Relative to our prior outlook, we recorded $1.4 billion of unplanned net charges, consisting of $410 million for the Aeronautics classified program, $1.1 billion from the MFC classified program, with these amounts partially offset by $70 million of unplanned benefit from the C5 claim resolution.

 

As far as juvenile jokes from Elon Musk about displacing F35 with a fleet of drones; you need to tell me how deterrent a fleet of cheap drones are going to be in the pacific theatre. Here is a comment about the recent performance of Israeli F-35 in an actual combat.

 

And then the last thing I'll say is that there's -- based on, again, open source reporting. The experience of the Israeli Air Force against the Iranian air defense system, which they took out in one night with what they characterize as fifth-generation aircraft, and you can match up what's in their inventory, with no losses. That would clear the way for fourth-gen aircraft, drones to come in and devastate that country if the Israelis decided to do so. That's the kind of impact that the high-end platforms have, especially if you can network satellite imagery, autonomous vehicle, drone imagery and a companion to control speed that no one else can muster. You can have that kind of lopsided victory. And that's another reason I think that the F-35 is going to demonstrate its value here, through the Israeli experience.

 

So between the juvenile jokes from Elon Musk and surprise charges against its earnings, the stock had to go down. We know one thing for sure the CEO follows free cash flow per share as his key KPI. The same KPI he was using when leading American Towers.

 

Our financial focus remains on free cash flow and free cash flow per share. Our company continued to deploy significant free cash flow in 2024 and we've returned greater than 100% of that free cash flow to you, the shareholders. In addition to our consistent and healthy dividend, we maintained a robust share repurchase program, with $3.7 billion of shares repurchased in 2024.

 

Transdigm had share repurchase activities in the last quarter. About $316 million were deployed. Not a big number but given that Transdigm very rarely does share repurchase it may have helped it a bit. Last repurchase was $912 million in 2022, before the stock took off.

 

The company does have a third of its revenue from the defense sector, and i think compared to the major primes it is mostly in lower value item. Does that (1) help or (2) hinder it hiding from the Eye of DOGE.

 

(1) DOGE wanting to focus on major primes

(2) DOGE going after easy lower hanging fruits for show

 

Additionally, we had strong operating cash flow generation in Q1 of over $750 million and ended the quarter with almost $2.5 billion of cash. We expect to steadily generate significant additional cash throughout the remainder of 2025. Next, an update on our capital allocation activities and priorities. During Q1, we opportunistically deployed just over $300 million of capital via open market repurchases of our common stock. This equates to approximately 250,000 of our shares at an average price of $1,249 per share. We view these repurchases like any other capital investment and expect this will meet or exceed our long-term return objectives.

 

--

Most international markets saw stable growth with Asia Pacific, the major driver of the increase. Shifting to our defense market, which is traditionally is at or below 35% of our total revenue. The defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 11% compared with the prior year period. Q1 defense revenue growth was well distributed across our businesses and customer base. We saw similar growth in both the OEM and aftermarket components of our total defense market. with the aftermarket running slightly ahead of OEM.

 

RTX too me is the best in class in terms of broad exposure. One of the most overlooked side of RTX, is the Collins Aerospace business. Most people either focus on Raytheon or Pratt & Whitney when talking about the company.

 

Collins Aerospace is the RTX subsidiary brand that started with Hamilton-Sundtrand, but has since rolled-up Goodrich, Rockwell Collins (which itself had bought B/E Aerospace). They do avionics, interiors, landing gears, nacelles, you name it. Folks often talk about how RTX's P&W is limited only to narrow-body and A.320 family, but they forget that RTX's other business (Collins Aerospace) has a lot of exposure to wide-body and the Boeing side of narrow body market: B.737. All be it small. 

 

This is from Sept last year. But I thought it was good listen. 

RTX - 1685813 

 

Note, this summer the Air Show will be in Paris. It switches between France and UK every other year. RTX does a Investor Meeting every two years when it is in Paris. Last one was in summer of 2023 that was soon followed by the engine issues. Since then they have been handling the issue and used the opportunity to repurchase a big chunk of its own shares.

 

I believe that opportunistic accelerated share repurchase program in 2022 has captured all the share buyback they wanted to do as per their commitment in Paris in 2023. So we will see what they have to say in 2025 in summer in terms what's coming next.

 

 

 

 

 

Edited February 10 by Xerxes