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 Tuesday at 12:24 AM 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.