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Zacks Industry Outlook Highlights: Northrop Grumman, Raytheon, Huntington Ingalls, General Dynamics and Lockheed Martin

Zacks Equity Research
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For Immediate Release

Chicago, IL – November 20, 2017 – Today, Zacks Equity Research discusses the Aerospace & Defense, including Northrop Grumman Corp. NOC, Raytheon Company RTN, Huntington Ingalls Industries, Inc. HII, General Dynamics Corp. GD and Lockheed Martin Corp. LMT.

Industry: Aerospace & Defense, Part 2

Link: https://www.zacks.com/commentary/137560/is-us-north-korea-tiff-driving-the-us-defense-industry

While President Donald Trump and North Korean president Kim Jong-Un indulged in verbal blows over the past few months, the U.S. aerospace and defense industry has thrived. There’s no denying that, while deal making activities have been historically boosting defense stocks, repeated counteractive missile-tests conducted by these two nations have been vital to the broader Aerospace sector’s Q3 outperformance.

On top of the possibility of military action in the Korean peninsula, a recent wave of mergers between big aerospace and defense companies has given this industry a lift.

In addition, Trump’s fiscal 2018 (FY 2018) ‘America First Budget’ has been another determinant of the defense stocks’ solid gains. Impressively, through this proposal, the President not only repealed defense sequestration enacted by his predecessor in 2011, but also made a mark in American history by presenting the largest one-year increase in the nation’s fund for the Department of Defense (DoD).

Also, other factors like Trump’s new defense strategy for Afghanistan, recent cyber security threats that affected nations worldwide as well as sporadic attacks in European nations continued to boost the Aerospace sector as a whole.

Altogether, these factors have helped the United States to remain at the top when it comes to military expenditure. Notably, military spending consumes more than 50% of the U.S. discretionary budget, way ahead of the second and third spot holders China and Russia, respectively.

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

Frequent U.S.-North Korea Tiff: The now familiar geopolitical tension between North Korea and the United States is one of the major reasons why shares of the U.S. defense contractors have surged multiple times in the recent past. Moreover, in response to Kim’s fanatic military actions taken against the United States and threats to its ally Japan, Trump made the "fire and fury" comment. He strongly condemned Kim’s hostile action, reflecting the U.S.’ readiness to counter-attack any time necessary and in turn, defense stocks rallied. In particular, companies that either manufacture high-end missiles or offer missile surveillance services like Northrop Grumman Corp. and Raytheon Company gained the most.

While such cross-border tensions hinting at the possibility of upcoming wars does not favor a nation’s GDP growth, these act as forerunners for stock market surges, especially for stocks in the aerospace and defense industry. 

Recent Upside in Budget: On Sep 18, 2017, the U.S. Senate passed the National Defense Authorization Act (NDAA), better known as the FY18 defense policy bill, worth roughly $700 billion that extensively surpassed President Trump’s budget request. The bill provisioned $640 billion for the Pentagon's base budget and $60 billion for the Overseas Contingency Operations (OCO) account. It authorized an additional $8.5 billion for the Missile Defense Agency to strengthen homeland, regional and space missile defense, which is $630 million higher than the Trump administration's request.

In addition, the bill includes $6 billion to boost Navy shipbuilding. This would benefit the nation’s prime shipbuilders like Huntington Ingalls Industries, Inc. and General Dynamics Corp. The legislation also authorizes over $141 billion for military personnel costs, providing a 2.1% increase in pay for troops.

Moreover, the FY18 defense budget that Trump presented this March reflects a 10% hike from the FY16 level. With 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): In addition to catering to a large domestic market, U.S. defense majors are expanding their foreign markets rapidly, taking advantage of regional tensions prevailing in the Middle East. Such tensions include civil wars in Syria and Bahrain, the unrest in Iraq, Yemen and Libya, and Iran’s strained relationship with the U.S. over oil. Moreover, the recent vehicle attacks in London, Barcelona and Paris show that the developed nations of Europe have also failed to escape the scythe of terror.

Further, lack of regional arms control regulation has prompted Asian emerging nations like India and Japan to boost their arsenals. U.S. being the top global arms exporter is seeing added arms imports by these foreign countries. This is giving U.S. aerospace and defense business a big boost.

Of the recent FMS contracts, notable is the $3.8 billion-worth deal that Lockheed Martin Corp. sealed with the Bahrain administration, in October. Per the deal, an arms package including Lockheed Martin’s F-16 jets, upgrades, missiles and patrol boats; will be sold to the Bahrain Defense Force. Notably this deal got stalled last year, when Obama’s administration disapproved it, citing Bahrain government’s failure to demonstrate noticeable progress on human right issues.

In July, Lockheed Martin inked a landmark deal with Tata Advanced Systems Limited (TASL) to jointly manufacture the F-16 Block 70 fighter jets of the former in India. This came as a move to expand its foothold in the market of India, the world’s largest military weapons importer. Surely, these FMS deals will boost the company’s F-16 product line considerably, which has been suffering lately due to dearth of orders.

Notably, doubts were raised in relation to Trump’s foreign defense policies during early days of his presidency. However, the U.S. situation in terms of FMS deals seems to have only improved, under his rule.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.


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Northrop Grumman Corporation (NOC) : Free Stock Analysis Report
 
General Dynamics Corporation (GD) : Free Stock Analysis Report
 
Lockheed Martin Corporation (LMT) : Free Stock Analysis Report
 
Huntington Ingalls Industries, Inc. (HII) : Free Stock Analysis Report
 
Raytheon Company (RTN) : Free Stock Analysis Report
 
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