For Immediate Release

Chicago, IL – April 07, 2017 – Today, Zacks Equity Research discusses the Industry: Aerospace/Defense, Part 2, including Boeing Company (NYSE: BA – Free Report ), Lockheed Martin (NYSE: LMT – Free Report ), Raytheon Company (NYSE: RTN – Free Report ), L3 Technologies, Inc. (NYSE: LLL – Free Report ) and TransDigm Group Inc. (NYSE: TDG – Free Report ).

Industry: Aerospace/Defense, Part 2

Link: https://www.zacks.com/commentary/109221/has-trump-really-given-a-boost-to-defense-prospects

The Islamic State of Iraq and Syria (ISIS) has gathered more power over the past few years, flaring up radical Islamic terror attacks across the globe. While President Obama never really discouraged the nation’s defense expenses, President Trump has been criticizing his predecessor’s budget sequestration decision taken in 2013; particularly with respect to the defense frontier.

Moreover, with his recent fiscal 2018 budget proposal of a record 10% hike in defense spending, President Trump looks to wage a “War on Terror,” in line with commitments he made during his campaigns as well as from the very first day of his tenure. Undoubtedly, such a hike is expected to usher in a ‘golden era’ for stocks in the aerospace and defense industry; thereby attracting more investors to them.

In addition, widespread macroeconomic as well as geo-political uncertainty has pushed up demand for weapons in recent times. With the U.S. being the largest supplier of the world’s most-advanced weaponries, emergent global security threats force allied nations to turn to it for defense aid as well as buy state-of-the art ammunitions. Naturally, these are giving a boost to the Aerospace sector as a whole.

As expected, the U.S. remains atop all nations when it comes to military expenditure. Notably, military spending consumes more than 50% of the U.S. discretionary budget, way ahead of the second-spot occupant China and third, Russia.

Many of the defense majors in the nation are doing a decent job, propelled by the following strategies:

Recent Uptrend in Budget: On Mar 16, 2017, along with the fiscal 2018 (FY 2018) budget proposal, the Trump administration also put forward a request for additional FY 2017 appropriations. Under additional appropriations, the White House requested an extra base budget of $24.9 billion and Overseas Contingency Operations (OCO) budget worth $5.1 billion; taking total budget appropriation to $30 billion for FY 2017. This amended request also calls for a hike of more than 26,000 active military forces from the original FY 2017 request and more than 6,000 forces from FY 2016’s actual force strength.

In addition, these appropriations support future investment capabilities worth $15.5 billion in the aerospace and defense industry to improve the nation’s near-term and mid-term combat promptness to counter threats. Of this amount, $4.6 billion has been allotted for Army, $5.8 billion for Navy, $4.1 billion for Air Force and $1 billion for defense-wide spending.

Moreover, the proposed base budget appropriations of Mar 2017 seek to invest $13.5 billion in procuring additional and modernizing Army Apache and Blackhawk helicopters, F-35 and F/A-18 fighter aircraft, tactical missiles, unmanned aircraft systems, and Terminal High Altitude Area Defense interceptors. No doubt such spending will boost the business of defense biggies, in particular The Boeing Company (NYSE: BA – Free Report ) and Lockheed Martin (NYSE: LMT – Free Report ) that manufacture these defense equipment.

The FY 2017 budget request released by the Obama government had revealed plans to adjust the size of the force over the next several years to a level of 980,000 soldiers, 308 ships, 182,000 active-duty Marines and 55 Air Force tactical fighter squadrons. This indicated a likely expansion strategy in the U.S. military force. Now, with President Trump being highly in favor of defense spending, these numbers have a huge chance of getting elevated in the coming days.

Foreign Military Sales (FMS): Big defense operators in the U.S. are expanding their markets rapidly, with foreign sales acting as a key top-line growth driver. Political conflicts and regional tensions have been driving demand for foreign sales, particularly in the Middle East with the ongoing military clash between two political parties in Iran since last year and Saudi Arabia’s alleged role in it, the Syrian civil war, the unrest in Iraq, Yemen and Libya, and a coup operation conducted in Turkey last July.

Developed nations of Europe have also failed to escape the scythe of terror. The Paris attack of Nov 2015 took 130 lives and a series of terror threats that followed affected citizens of Brussels, Berlin, Normandy and the most recent in London. Moreover, with no regional arms control regulation in place, the emerging nations in Asia such as India and Japan are continuing to boost their arsenal. U.S. being the top global arms exporter is seeing added arms import by these foreign countries. This is giving U.S. aerospace and defense business a big boost.

Of the recently made FMS deals, worth mentioning is the $3.3 billion modification contract that Boeing clinched last month from the U.S. Army for supplying lot 7-11 of AH-64E Apache attack helicopters to the government of Saudi Arabia. Work related to this multi-year deal is expected to be over by Jun 30, 2022. In February, Raytheon Company (NYSE: RTN – Free Report ) secured an FMS deal worth $1.1 billion from the U.S. Air Force. Under the terms of the deal, the company will provide an early warning radar system to the Qatar government, which will be incorporated into the nation’s integrated air and missile defense enterprise.

There were doubts in relation to Trump’s foreign defense policies when he attained presidency as repeatedly referred to insufficient contributions from many alliance partners during his campaign. However, over past few months, the U.S. situation in terms of FMS deals seems to have only improved.

Restructuring/Acquisition : To maintain margins in a tough business environment, companies are squeezing costs out of their operations and diversifying into new business areas. Commercial aviation is one such diversification play, with opportunities in emerging markets driving the trend.

New macro challenges are prompting industry players to revisit their business models. One such example is the recently completed takeover of Implant Sciences’ explosives trace detection (ETD) assets by L3 Technologies, Inc. (NYSE: LLL – Free Report ) for $117 million. These assets will help L3 Technologies increase its capabilities in the global aviation security and national security markets by offering domain expertise and technical capabilities that Implant Sciences has in innovative tracing solutions, apart from boosting L3 Technologies’ sensor portfolio.

In February, premium engineered aircraft components provider TransDigm Group Inc. (NYSE:TDG – Free Report ) acquired SCHROTH Safety Products GmbH and aviation & defense assets and liabilities of Takata Corporation for a total of $90 million. With the acquired assets, the company will focus on designing and manufacturing proprietary, highly engineered, advanced safety systems for aviation, racing, and military ground vehicles.

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