Defense contractors

[UK]

https://www.wsj.com/world/europe/wars-push-up-demand-for-weapons-sparking-fears-of-shortages-57d664ad?mod=hp_lista_pos1

 

With demand increasing faster than production, prices of some supplies have soared. NATO-standard 155-millimeter artillery shells, one of the West’s most basic armaments, had cost governments about $2,100 apiece before Russia’s invasion of Ukraine last year, said Dutch Admiral Rob Bauer, Stoltenberg’s top military adviser, at the NATO forum. The price of those shells, which Bauer dubbed “one of the most coveted objects in the world right now,” has increased fourfold, to about $8,400, he said.

...

General Dynamics said it has been able to boost production of artillery shells and other munitions faster than expected, boosted by Pentagon investment in new facilities. The company is targeting annual production of one million shells, a fivefold increase. Sales at its combat unit, which employs more than 2,000 staff in Europe, had been expected to be flat at best this year. They are up 15% so far this year, stoked by orders for shells, as well as for armored vehicles and military bridges. “Frankly, we don’t see that demand signal slowing down,” Aiken said.    

 

[Spekulatius]

Checkup on LHX. Looks like they stop deals for a while which should not surprise anyone.

https://seekingalpha.com/news/4045760-l3harris-to-halt-ma-activity-for-foreseeable-future

 

I looked at the latest shareholder presentation and quite frankly wasn’t too impressed. very modest margin improvement projected from a bit less than 15% to 16% in 2026. The 2026 FCF target of $2.8N translates into $14.7 in FCF/ share which I think is a bit less than what forecasts are projecting. And all that with quite a bit of leverage also the sale of the commercial pilot training business will reduce this somewhat.

 

The rest of the shareholder presentation was just platitudes (digital factory, cost saving  blah blah blah )

https://www.l3harris.com/sites/default/files/2023-12/LHX_InvestorDay_ExecutivePresentations_Final.pdf

[Xerxes]

Was never a L3 fan. Not because of any great insight on my part.
 

Just that it never seemed to have a core franchise like others. So it always seemed like a distant sixth behind the A&D majors. With all the wars and defense concerns that are happening, these guys don’t seem to be able to leverage their tilt toward short-cycle heavy side of the business.
 

In contrast to the long-cycle business tilted five majors.  
 

Interestingly, L3 was a minor subsidiary of Lockheed at some point in the 90s from which it was carved out. And one of the “L” in L3 stands for “Lehman Brothers”.

Say WHAT ?!?

[Spekulatius]

Harris was a great business (satellites ) while L3 was an acquisitive rollup with somewhat subpar margins. I m thinking that similar to the Boeing/Mc DonnelDouglas merger, the junior partner won with LHX and now the business looks more like L3 rather than Harris. CEO Kubacik is from L3 as well and continued the acquisitions after the L3 merger. I particularly see Aerojet Rocketdyne as a questionable fit, since they now compete with customers. I guess AJRD was acquired because they could buy it (LMT or NOC were not allowed to) not because it was a good fit.

 

In any pandemic, case, to me, the IR day presentation does not look all that convincing. I do like that Shaw is not keeping management on a shorter leash.

[Spekulatius]

B21 public flight. Beautiful bird. Seems on schedule too:

 

[Xerxes]

+$60B signed off and no algorithm-driven pop on the open on the big defense names 

[fareastwarriors]

Conflicts drive global military spending to record high

 

 

[dealraker]

When Spek was chanting up a couple of the defense stocks RTX and LHX I bought them at what seemed good values (why Spek was there), the prices fell some and it was rational to buy more...and now the prices are up 20% or so.  But from my experience I'd never chase up a defense name based on projected spending as to current/future ongoing or potential conflicts.  I already owned the other names and had added to GD a tad but I have no interest in adding based on expected increases in military spending.  I've seen this theme switch directions too many times.  

Edited April 23 by dealraker

[Xerxes]

@dealraker

 

I don’t think anyone here is buying defense contractors based on defense budget increase or outlook of. Not me anyways.  
 

they are just great allocators of capital, going all the way back to the Last Supper in the 90s. That is why I own them. And their programs have long tails and runways. 
 

And in any case, they did fabulously well during the 2010s Obama years of defense sequestration. 
 

 

[dealraker]

1 hour ago, Xerxes said:

@dealraker

 

I don’t think anyone here is buying defense contractors based on defense budget increase or outlook of. Not me anyways.  
 

they are just great allocators of capital, going all the way back to the Last Supper in the 90s. That is why I own them. And their programs have long tails and runways. 
 

And in any case, they did fabulously well during the 2010s Obama years of defense sequestration. 
 

 

Yep.  

[Spekulatius]

Yes, the defense budget is already old news. The defense stocks are very dependable slow growers typically so while the business model is like an industrial , they are almost like annuities or consumer staples in a sense. You get extra browny points owning them if there is geopolitical strife and local wars. I keep holding RTX mostly and sold out of LHX in my IRA accounts (for a profit).

 

One thing to keep in mind instant the Ukraine war has not been as good as you might think for defense stocks, as some focus has shifted from F35 to other more pressing issues, which has hurt LMT for example.

[coffeecaninvestor]

L3Harris Technologies Reports Strong First Quarter 2024 Results, Increases 2024 Profitability Guidance

 

• Orders of $5.5 billion; book-to-bill of 1.06x

• Revenue of $5.2 billion, up 17%, up 5% organically1

• Operating margin of 7.3%; Adjusted segment operating margin of 15.1%

• Earnings per share (EPS) of $1.48; Non-GAAP EPS1 of $3.06

• 2024 adjusted segment operating margin 1 guidance increases from ~15% to >15%*

• 2024 non-GAAP EPS guidance range increases from $12.40 - $12.80 to $12.70 - $13.05*

 

 

A little pop out of LHX today... Seems to be heading in the right direction.

 

They seem to be achieving the integration savings from the merger, reduction to debt, and they seem to be optimistic on the demand for Aerojet. They restarted their buy back but only enough to offset dilution. They mentioned they are going to be reducing and simplifying the adjustments to their non-gap numbers. I would like to see more prime contracts, and expansion internationally.  

 

 

[Xerxes]

Was never fan of L3. 
 

When it comes to the defense industrial complex, I am only interested in their priority and/or consistency in returning capital and the longevity of their program. 
 

RTX and Lockheed come ahead as they have a focus on FCF per share and EPS. It is worth mentioning the CEO of Lockheed comes from the American Tower fame. 
 

And you can see that in spade. They are the only ones that put in place large ASR when market fell below franchise value. 
 

Northrop and General Dynamics comes next. Great franchises and very term runway, but very consistent capital return policy (too consistent as they always return 100% via dividends and buyback). But no desire to reduce share count considerably beyond what their FCF allows them to if a special situations gives them that opportunity. Northrop own’ slides shows a focus on FCF but not on FCF per share. 
 

and I don’t where L3 is at 

[coffeecaninvestor]

1 hour ago, Xerxes said:

Was never fan of L3. 
 

When it comes to the defense industrial complex, I am only interested in their priority and/or consistency in returning capital and the longevity of their program. 
 

RTX and Lockheed come ahead as they have a focus on FCF per share and EPS. It is worth mentioning the CEO of Lockheed comes from the American Tower fame. 
 

And you can see that in spade. They are the only ones that put in place large ASR when market fell below franchise value. 
 

Northrop and General Dynamics comes next. Great franchises and very term runway, but very consistent capital return policy (too consistent as they always return 100% via dividends and buyback). But no desire to reduce share count considerably beyond what their FCF allows them to if a special situations gives them that opportunity. Northrop own’ slides shows a focus on FCF but not on FCF per share. 
 

and I don’t where L3 is at 

LHX has long term compensation EPS and ROIC metrics. They seem pretty adept at capital allocation. Hopefully as their FCF increases they can reduce their share count. 
 

I am a fan of GD as well I bought some in 2020 when it looked very attractive. 

[Spekulatius]

6 hours ago, coffeecaninvestor said:

LHX has long term compensation EPS and ROIC metrics. They seem pretty adept at capital allocation. Hopefully as their FCF increases they can reduce their share count. 
 

I am a fan of GD as well I bought some in 2020 when it looked very attractive. 

LHX has very straightforward management incentives. They have been bulking up with acquisitions to become a prime contractor, but it has stretched their balance sheet somewhat.

 

I think GD is probably the best run of the primes. LMT has a great balance sheet so they could flex when growth prospects are limited because some much is dependent on the F35 program which is not a priority in the current defense budget.

[coffeecaninvestor]

8 hours ago, Spekulatius said:

LHX has very straightforward management incentives. They have been bulking up with acquisitions to become a prime contractor, but it has stretched their balance sheet somewhat.

 

I think GD is probably the best run of the primes. LMT has a great balance sheet so they could flex when growth prospects are limited because some much is dependent on the F35 program which is not a priority in the current defense budget.

Do you think that is a long term problem for LMT? 
 

[Xerxes]

[Spekulatius]

An example of a drone weapon system that is developed based on learnings from the Ukraine war.

 

Based on below YouTube video this drone has a 10km range

Has GPS but does not really on it (one of the key learnings from Ukraine war is that GPS is relatively easy to jam 

Visual range and IR camera (for night and heat detection)

Up to 70mph burst speed

Does lock in targets automatically, selected targets are automatically tracked ,controller can command an attack with parameters (angle of attack)

several 1 pound payloads (sensor for observation only), tungsten ball shotgun explosive, armor penetrating explosive. 
 

1 pound does not sound much, but we know from Ukraine how vulnerable even tanks are from attack from above mostly because armor on top is relatively thin. Tanks and armored carriers are armored to withstand attacks from the front and less so from the side, but much less so from the top (they would become much heavier and bulkier). So my guess is that 1 pound armor penetrating payload can probably disable a personal carrier but probably not a tank and it the tungsten ball payload certainly  destroy vehicles, or troops even in trenches.

 

I am guess that this will go to sniper teams first but I can see this becoming an arsenal for regular troops . You don’t really need to fly these drones either as they can be directed with macro commands apparently and are self stabilizing anyways, so much easier to operate than the switchblade drones that were all the rage earlier in the war.

 

Now it will be interesting what countermeasures the US is developing because protection from these type of drones or the more consumer variants is clearly necessary for troops and even armored units.

 

 

 

 

https://youtu.be/AEBC0I1-N2k?si=szGGb5z4w4HI85lq

[Xerxes]

Defense business is tough when your main customer imposes fixed-cost contracts. Ain’t that a bitc$

 

Perhaps there is a market share grab opportunity here … if only a defense prime with vast resources could lowball and grab all of defense opportunities. 

 

All that red ink was supposed to be subsidized by 737MAX printing press. 

 

[Spekulatius]

This CT40 40mm gun looks extremely impressive to me. It’s a whole new system development BAE and I think a Thales subsidy. Looks like GD may have the US license for this.

 

[Xerxes]

No historical analysis of BAE is complete w/o “Al Yamamah”

[UK]

https://www.ft.com/content/17f16071-87e0-4675-a152-6d6285b97fd5

 

Y Combinator, the San Francisco start-up incubator that launched Airbnb, Reddit, Stripe and Coinbase, is backing a weapons company for the first time, entering a sector it has previously shunned. Ares Industries, which launched last week, has pitched its “low-cost cruise missiles” as suited for use in a potential war between the US and China in the Taiwan Strait. The start-up claims that US weapons stockpiles would be exhausted within weeks in such a conflict, and that “recent conflicts in the Middle East and Ukraine have shown that our weapons are too large, too expensive for the wars of today”. Ares’s founders, Alex Tseng and Devan Plantamura, say their $300,000 anti-ship cruise missiles “will be 10x smaller and 10x cheaper” than today’s alternatives. On the YC website, Tseng’s biography consists of a single sentence: “Missiles are cool.”
...

The US defence industry is dominated by an oligopoly of contractors such as Raytheon and Boeing that receive an overwhelming majority of government contracts. Anduril Industries, the most prominent defence tech start-up, raised $1.5bn this month to accelerate the production of autonomous weapons for the US military and its allies. That investment was led by Peter Thiel’s Founders Fund, one of the first big venture capital firms to embrace defence technology. Since then, venture investment has flooded in from mainstream companies such as Andreessen Horowitz and General Catalyst. In the past year, Sequoia Capital, one of Silicon Valley’s pre-eminent firms, made its first investments in defence and weapons. It backed Mach Industries, which makes hydrogen weapons, and Neros, a drone-maker aiming to boost the supply of quadcopters to Ukraine for use in data gathering, mine clearing and offensive missions.
...    

Rather than building massive, complex weapons systems, the start-ups are focused on cheaper weapons and drones that can be produced quickly at scale. Anduril’s new funds will go towards a network of weapons factories which the company says will adopt the manufacturing techniques used by Tesla to boost production. Jared Friedman, a partner at YC, said the company started actively encouraging defence tech start-ups to apply earlier this year. “Why now? It’s not that we wouldn’t have funded this earlier, but simply that this is the first time that a great company like this applied,” he said.
 

Edited September 2 by UK

[Spekulatius]

While the industry is dominated by large players, there were always a bunch of upstarts in the defense space. In most cases they develop some specialized technology (I know some folks who developed  optics for satellites and many drones came from upstarts) and they typically get acquired  by large defense contractors later. The US military has many funding programs for smaller cos to do innovative work. Quite a bit of it actually transitions to commercial use later or becomes dual use.

 

I think Anduril is just the first one who does this on a large scale with VC backing and they market themselves well. However what they are doing isn’t really that new in many respects.

[Dinar]

1 minute ago, dealraker said:

When Spekulatius writes as to the defense industry, I do follow and appreciate.  It wasn't my find nor really a decision I had to make.  It was far more monkey-see...monkey do.  We continually give thanks on the COBF to those following Fairfax, so here's one for the Spek!  A couple of months less than a year invested...an in my taxable account...a position I do not have to sell most likely.  In a taxable account a good start and a good business that's not overpriced today is worth far more than the figures presented - if you do not have to sell it.  Yes if the business continues to progress and a sale is not needed?  Dreams are made of this stuff.

 

Unrelated to the below, It is the largest position in my recently remodeled (October of last year) retirement account via appreciation.  

 

RTX,popup RTX CORP

Multiple(2)

4,000 @ $72.87

$123.34

$493,360.00

+$201,880.00

Why wouldn't you own Safran or GE?  Better businesses and better growth prospects.  

[dealraker]

3 minutes ago, Dinar said:

Why wouldn't you own Safran or GE?  Better businesses and better growth prospects.  

Well I do own GE, as mentioned here some time ago before the split I bought.  But completely unaware of Safran.