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Defense spending is about to skyrocket: here’s how to play it

15 December 2016 in Trading Ideas

With Donald Trump’s inauguration on the horizon and Republicans set to be in control of both houses of Congress, we’re almost certain to see a major boost in defense spending in the United States. There are plenty of ways for investors to take advantage of the boom.

Military spending accounts for more than half of all federal discretionary spending in the United States, outpacing the rest of the world by a wide margin.

The U.S. defense budget in 2015 was about $598 billion, well above $146 billion for China, $82 billion for Saudi Arabia and $66 billion for Russia. In fact, the U.S. defense budget was nearly as much as the next 14 biggest spenders combined.

Trump’s election is likely to increase America’s already outsized defense budget.

He campaigned on a pledge to work with Congress to submit a new budget to bulk up the military, including investing in missile defense systems, Navy cruisers and destroyers and emphasizing defenses against cyber warfare. The real estate magnate’s campaign platform includes 350 new Navy ships, 1,200 aircraft and thousands more Army soldiers and Marines.

“We will rebuild our military and alliances, destroy terrorists, face our enemies head on and make America safe again,” the president-elect said at a thank you rally in Fayetteville, North Carolina in December, where he appeared alongside his pick for Defense Secretary, retired Marine General James Mattis.

Congress has already signaled big-budget defense plans in the year to come, overwhelmingly backing the $618.7 billion National Defense Authorization Act annual defense bill earlier this month.

Representative Mac Thornberry, chair of the House Armed Services Committee, said he hopes the Trump administration will request more defense funding once he is inaugurated. Vice President-elect Mike Pence said the administration plans to submit a request for supplemental defense spending within the first 100 days of taking office.

Lockheed Martin is the most important getter of government contracts, defense and otherwise.

It saw $36.2 billion in U.S. federal contract obligations in 2015, $29.4 billion came from the Department of Defense. Boeing got $14.6 billion in defense contracts, Raytheon $12.4 billion, General Dynamics $11.8 billion and Northrop Grumman $9.5 billion, to round out the top five.

“Lockheed Martin’s dominance can be explained by the F-35, Trident Fleet Ballistic Missile, C-130J and electronics, weapons and services programs too numerous to list,” Byron Callan, industry analyst at Capital Alpha Partners, said in an interview with DefenseNews.

The companies currently getting the most Defense Department funds are likeliest to benefit if Trump and Congress follow through on election promises to up military spending.

To be sure, there are no guarantees, especially given the unpredictable nature of the president-elect.

Negotiations for heating and air-conditioning systems maker Carrier to prevent Indiana jobs from moving to Mexico reportedly hinged on concerns over federal contracts for Carrier’s parent company, United Technologies. The firm saw $6.7 billion in Defense Department contract obligations in 2015.

Trump has targeted aerospace giant Boeing, taking to Twitter to criticize the cost of the company’s work on building two new Air Force One planes on December 6.

In an interview with Fox News’ Chris Wallace, Trump appeared to take aim at Lockheed Martin’s F-35 aircraft weapons systems program.

“If you look at the F-35 program with the money, the hundreds of billions of dollars and it’s out of control, and the people that are making these deals for the government, they should never be allowed to go to work for these companies,” he said.

Still, most believe things are looking up for defense contractors in light of an incoming Trump administration.

Lockheed Martin, Northrop Grumman and L-3 Communications recently saw their stocks upgraded by Barclays in reaction to Trump’s election.

“There’s reason for cautious optimism on the defense spending side,” wrote retired Lieutenant General David Melcher, current president and CEO of the Aerospace Industries Association, in a recent op-ed.

Lockheed CEO Marilyn Hewson recently said Trump’s stance on international defense — namely, his insistence NATO allies shoulder more of the global security cost — could benefit her company as well.

“As they do that I think there are opportunities for Lockheed Martin to continue to sell products and services to them to build up their defense capability,” she said.

PricewaterhouseCoopers said recently Trump could spur a small boost in defense and aerospace research and development activities as well.

Defense stocks have already begun to creep upward. Since Election Day, shares of Lockheed Martin, Boeing and Raytheon have all climbed 7% to 9%, and General Dynamics has gained 15%.