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Could Space Militarization Benefit U.S. Defense Industry?

Zacks Equity Research
Fidelity National's (FNF) fourth-quarter earnings suffer due to diminishing revenues.

The Trump administration’s aggressive pursuit of a new space-based missile defense system in a bid to counter existing threats could prove significantly beneficial for the American defense sector.

President Donald Trump is expected to uncover a new strategy that may provide an insight into America’s space control weapons on Jan 17. Given the geopolitical tensions between the United States and countries such as Russia and China that are developing space weapon systems, Pentagon’s new defense technologies in space could be apt.

Therefore, focusing on equities of a few defense companies could be prudent at present.

Global Pursuit Toward Space Weaponization

An unclassified Defense Intelligence Agency report released on Jan 15 revealed that China is conducting sophisticated satellite operations and could be testing on-orbit dual-use technologies that could be used to pursue space missions.

The report also cited an instance when China destroyed a weather satellite in 2007 using an anti-satellite missile, and therefore, U.S. satellites used for navigation, early warnings and communication might be susceptible to attacks.

Russia and China’s development of cruise missiles and hypersonic weapons are of alarming nature as well, since U.S. aircraft carriers, airbases etc. could be targets for attacks. Hypersonic missiles are a much more likely threat than nuclear weapons as these could be effective in a conventional fight because of their tactical, long-range and precision-guided systems.

The existing threats from North Korea and Iran make it imperative for space-based interceptors, since these could not only help in identifying incoming enemy missiles but also in destroying them in the first few minutes of flight.

Pentagon’s Measures to Counter Space Weapons

According to a Bloomberg report, the United States increased missile defense spending by 25% to $9.9 billion in the current fiscal year. The United States is specifically interested in laying out a layer of sensors in space that can easily detect enemy strikes at the moment of launch.

The need for intelligence gathering to be an automated process in order to counter an attack is what forms the basis of space sensors. Robert Zitz, senior vice president and chief strategy officer at SSL, which is the satellite manufacturing wing of Maxar Technologies, said that the foundation for a space layer would be artificial intelligence along with sensors and satellites.

In a bid to develop space sensors, or missile-warning satellites, Lockheed Martin LMT was equipped with a $2.9 billion contract by the Air Force last year. The company is developing three missile-warning satellites that are due for completion by April 2021. In addition, Northrop Grumman NOC was chosen to develop polar orbit satellites that are expected to be ready by June 2020.

Lockheed Martin and Northrop Grumman’s growth estimates that stand at 31.43% and 43.7%, respectively, for the current year beat the Zacks Aerospace - Defense industry’s growth estimate of 22.1%. Lockheed Martin carries a Zacks Rank #3 (Hold) and Northrop Grumman carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Raytheon RTN is developing a wide range of systems for intelligence gathering that comprise of satellite launch, earth observation, constellation planning and scheduling and various products for space missions.

Raytheon’s growth estimate of 32.6% beats the Zacks Aerospace – Defense Equipment industry’s growth estimate of 15.3%. Raytheon carries a Zacks Rank #3.

Other major players in the segment that are working on related works are General Dynamics GD and Aerojet Rocketdyne AJRD.

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