Defense contractors absolutely crushed it in President Donald Trump’s first year.
The president’s aggression and pledge to go on the offensive with the militarily sent defense stocks soaring as soon as November 9, 2016 — the day after he was elected.
And in 2017, the SPDR S&P Aerospace & Defense ETF surged 34%, compared to 21% for the broader S&P 500.
Of course, Trump isn’t the only reason that defense contractors are blowing up.
He’s gotten a lot of help from North Korean Leader Kim Jong Un and other belligerents, including Russia, China, Saudi Arabia, Iran, Israel, and more.
No doubt, tensions are on the rise worldwide.
And so are defense budgets...
Global defense spending is forecast to rise 3.3% in 2018 to $1.67 trillion.
That’s the highest level since the end of the Cold War.
And the U.S., as always, will lead the charge.
Trump has already authorized nearly $700 billion in national defense spending for fiscal 2018. That’s a 20% increase from former President Barack Obama’s full-year 2017 budget request of $580 billion.
The Trump administration has also directed its overseas diplomats to act as salesmen for the U.S. defense industry and is cutting back restrictions on U.S. arms exports.
Given all that, there’s no doubt that defense contractors will continue outpacing the market.
These are the top five:
- Raytheon Company (NYSE: RTN)
- Lockheed Martin Corporation (NYSE: LMT)
- General Dynamics Corporation (NYSE: GD)
- Northrop Grumman Corporation (NYSE: NOC)
- Huntington Ingalls Industries, Inc. (NYSE: HII)
1. Raytheon Company (NYSE: RTN)
Raytheon Company operates in a broad range of segments that include:
- Missile defense
- Command and control
- Sensors and imaging
- Electronic warfare
- Precision weapons
- Mission support
Raytheon stock returned 29% in 2017, and 2018 is off to an equally promising start.
The company already plans to sell four SM-3 Block IIA missiles, missile canisters, and other technical, engineering, and logistics support services to Japan for $133 million. These are antiballistic missiles, intended to defend against the growing threat from North Korea.
Furthermore, Raytheon’s RTN Missile Systems business recently clinched a foreign military sales (FMS) contract worth $634.2 million for its Advanced Medium-Range Air-to-Air Missile (AMRAAM).
And on January 4th, an undisclosed nation that already possesses the Patriot Integrated Air and Missile Defense System (there are 14 such nations) signed a $1.5 billion contract for Raytheon to provide additional capability.
Finally, the U.S. Air Force has solicited Raytheon’s Forcepoint cybersecurity division for software to be deployed at its warrior preparation center...
2. Lockheed Martin Corporation (NYSE: LMT)
Lockheed Martin Corporation is the world’s largest defense contractor, and its stock jumped 26% last year.
Like Raytheon, it’s found an eager new buyer in Japan. The country recently approved the purchase of two Lockheed Aegis Ashore batteries at a cost of $2 billion. It also recently received a $10 million contract to outfit the USS Stout with its AEGIS Ballistic Missile Defense (BMD).
Furthermore, Japan and South Korea are also considering buying the short takeoff vertical-landing variant of Lockheed's F-35. Both countries are already buying scores of the conventional takeoff version, the F-35A. But having the F-35B in their arsenals would enable them in deploying the stealth fighters from ships, not just from land bases.
Lockheed isn’t just gaining in the defense industry, either. It’s making a serious effort to push into the broader tech sector.
It has a lab in California that's working on things like advanced telescopes, which could be used on satellites, drones, and driverless cars, and also a next-generation battery to replace lithium. Such technologies have a military application, for sure, but they could also be applied in the civilian sector.
The company also launched a venture capital firm, LM Ventures, for scouting and financing small Silicon Valley upstarts...
3. General Dynamics Corporation (NYSE: GD)
General Dynamics Corporation's business can be broken into four main segments:
- Aerospace — jets and other aircraft.
- Combat systems — tanks, combat vehicles, and light armored vehicles.
- Information systems and technology (IS&T) — secure communications, command, and control systems, imagery sensors, and cyber tools.
- Marine systems — complex ships like nuclear submarines.
GD scored two big contracts late last year and then snagged a third for the start of 2018.
First, its submarine division (Electric Boat) was awarded a $432 million contract modification by the U.S. Navy to provide research and development and lead-yard services for Virginia-class nuclear-powered attack submarines. The total value of the contract could rise to as much as $900 million by November 2018.
Secondly, GD’s IS&T division was awarded the Mission Training Complex Capabilities Support contract by the U.S. Army Contracting Command. The multiple award, indefinite delivery, indefinite quantity contract has a ceiling value of approximately $975 million with a five-year ordering period.
And thirdly, to start 2018, General Dynamics European Land Systems signed a contract to deliver up to 227 PIRANHA 5 wheeled armored vehicles to the Romanian armed forces.
GD stock climbed 16% in 2017. And it should do even better in 2018...
4. Northrop Grumman Corporation (NYSE: NOC)
Northrop Grumman Corporation is another defense behemoth.
Its core capabilities include:
- Logistics solutions
- Autonomous systems — drones, satellites, and space systems.
- Strike — such as the B-2 Spirit stealth bomber
- C4ISR (command, control, communications, computers, intelligence, surveillance, and reconnaissance)
Last September, Northrop acquired Orbital ATK — a maker of defense satellites, launch vehicles and tactical missiles, and also precision weapons — for $9.2 billion. Orbital brought more than $4.6 billion in revenue for 2017, a $15.4 billion contract backlog, and free cash flow of $250 million to $300 million.
More recently, Northrop Grumman’s Systems Corp. secured a $255.3 million modification contract for three MQ-4C Triton drones.
The MQ-4C Triton provides real-time intelligence, surveillance, and reconnaissance (ISR) over vast ocean and coastal regions. In November 2017, the U.S. Navy announced plans to deploy Tritons to Florida, Italy, and the Middle East.
The Navy has ordered 68 Triton aircraft total.
Further, Northrop won its first local contract of the new year on January 4th when the Department of Defense (DOD) awarded an $11.7 million contract for its E-2D Advanced Hawkeye. This aircraft is known as the "digital quarterback" of the battlefield. It monitors the surrounding area and communicates to battle groups to keep them from harm's way.
The company also has a joint venture with Lockheed Martin, known as Longbow LLC. It was awarded a $103 million contract from the U.S. Army on December 28th. Longbow will provide support services for the fire control radar that's mounted on top of the Apache attack helicopter...
5. Huntington Ingalls Industries, Inc. (NYSE: HII)
Huntington Ingalls Industries is America’s largest military shipbuilding company, operating in Newport News, Virginia, for 131 years now.
It’s the sole builder of U.S. Navy aircraft carriers (the world’s largest warships) and one of two builders of nuclear-powered submarines. It also builds Aegis guided-missile destroyers, amphibious assault ships, and the Coast Guard’s National Security Cutter (NSC).
In all, HII has built more than 70% of the Navy’s warship fleet. It has annual revenue of approximately $7.1 billion and a current backlog of $23 billion.
Strangely though, one of the company’s largest contracts has nothing to do with defense at all. Rather than churning out another ship, the group was awarded a $1.39 billion cleanup contract at the Los Alamos National Laboratory. The contract runs for 10 years and three months.
HII stock climbed 24% last year, gaining entry into the S&P 500.
Again, all five of these stocks are likely to continue advancing in 2018 and beyond.
@OCSimpkins on Twitter
Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of The Wealth Warrior, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page.
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