Trump’s Budget Reveals Defense Tech’s Hottest Plays

0 | By Michael A. Robinson

You’ll have to forgive Mike Petters if he seems a little tongue tied these days.

Ever since the Budget Control Act of 2011, things have been slow in the military shipbuilding industry.

That law is what led to “sequestration,” the across-the-board spending cuts of $1.2 trillion over 10 years, roughly half of that from defense.

So things have been a bit depressing in Norfolk, Va., and other shipbuilding centers.

But no longer.

Yes, the markets are under pressure this week, but here at Strategic Tech Investor, we tune out this kind of short-term noise and look for great long-term moneymaking opportunities. In fact, sell-offs like we saw yesterday give us a new buying opportunity.

While the talking heads on CNBC were going crazy over the Trump administration’s decision to slap tariffs on imported steel and aluminum, there’s some great news coming out of the White House that everyone seems to be ignoring.

Here’s the thing: Coming on the heels of a brief government shutdown, the recent budget deal will hand defense contractors an extra $75 billion over the next two years. The Pentagon intends to boost spending maintaining older equipment – and on new aircraft, missiles, tanks, and, yes, ships.

This major U.S. defense buildup caught many industry veterans by surprise.

“I had to actually go practice how to say the word ‘growth’ a few times before this call,” Petters, the CEO of a major shipbuilder, told his company’s analysts during a recent conference call. “We haven’t had a chance to talk about growth in shipbuilding for a long time.”

Petters’ company may be the biggest beneficiary of this new defense buildup – but it’s far from the only one.

That’s why, today, I want to tell you more about this company – and three others that will be making big bank on the strength of all those tens of billions heading the Pentagon’s way.

Let’s take a look…

Become a Trump Budget Beneficiary

Before we go into more details about these potential big winners, I want to take a moment to return back to a chat we had on Jan. 3.

At the time, I said 2018 was stacking up to be the best year for defense firms and their investors since the Ronald Reagan-era buildup that began in early 1981.

I still believe that. In fact, the budget deal just confirms my conviction.

As a group, defense stocks rallied 27% last year – and overall have outperformed the market so far this year.

But “crush” is what they’re going to do the rest of this year… and beyond.

With that in mind, I’ve identified four firms that I believe will strongly benefit from the extra $75 billion.

Their shareholders will benefit, too.

Let’s start with that shipbuilder…

Defense Budget Winner No. 1: The Shipbuilder

On Feb. 16, Huntington Ingalls Industries Inc. (NYSE: HII) snagged a massive $1.43 billion contract to design and build the LPD 29, a San Antonio-class amphibious transport dock.

These 684-foot-long ships are a major part of the U.S. Navy’s 21st century amphibious assault force. With them, Marines, their equipment, and supplies can get close to land – and then disembark and come ashore via hovercrafts or conventional landing craft. Plus, they can be used in a wide range of combat theaters.

The contract award is a clear reflection of Huntington Ingalls’ sterling industry reputation. The firm is known throughout the military as a supplier that can deliver massive new builds, on time and on budget.

Huntington Ingalls heads into the new defense spending upgrade cycle with ample momentum. Its fourth-quarter earnings of $3.11 a share were around 20 cents ahead of forecasts. And $8.1 billion in new contract awards in 2017 – before this newest award was announced – should keep its shipyards humming at a busy pace.

Defense Budget Winner No. 2: The Dow’s Hottest Stock

Also, look for The Boeing Co. (NYSE: BA) to get a solid boost from the new defense budget. This firm will play a key role in a range of new defense systems that the military has ordered.

For example, the U.S. Air Force plans to spend $3 billion on 15 of Boeing’s KC-46A Pegasus tankers, which fuel other planes midflight.

The new defense deal is also expected to lead to an uptick in orders for Boeing’s helicopter programs, the Apache and Chinook. It also calls for three more P-8 Poseidons that are used in anti-submarine and anti-surface ship warfare, and more spending on the firm’s Ground-based Midcourse Defense (GMD) program.

Of course, Boeing’s commercial aerospace business is already firing on all cylinders. It’s benefiting from strong orders for its 737 MAX 8 and 787 Dreamliner planes.

In fact, it’s already made peak gains of more than 20% so far this year, making it the Dow Jones Industrial Average’s best-performing stock of 2018. (It was the top Dow stock of 2017 as well.)

That strength has helped the firm’s adjusted earnings grow from $9 billion in 2015 to around $13.6 billion this year. Higher defense spending bolster the forward view as well.

Defense Budget Winner No. 3: The Top Gun

Meantime, Lockheed Martin Corp. (NYSE: LMT) is a top provider of fighter jets. It built 66 F-35 fighter jets last year, with plans to build another 80 of them this year.

Now, Lockheed Martin is drawing up designs for the next generation of fighter jets, which should fuel the firm’s next leg of growth.

Demand for such jets is bound to rise as the military plays “catch-up” from a spending slowdown.

According to testimony from Air Force officials in 2016, the military used to buy average of 200 fighter aircraft per year prior to 1992. That number fell sharply over the next two decades.

Now it’s rising.

But Lockheed Martin isn’t just about fighter jets. The firm also plays a key role in missiles, helicopters, integrated air and missile defense, and undersea warfare. Lockheed has deep expertise in radar, electronic warfare, cyber solutions, and logistics systems.

A strong order book in all of those areas is helping Lockheed Martin pump up adjusted earnings, from $6.76 billion in 2016 to a projected $9.55 billion by 2020.

Defense Budget Winner No. 4: The Bomber Building

And we get a play on aircraft, drones and missile defense with Northrup Grumman Corp. (NYSE: NOC). This firm builds a wide range of planes for all of the armed forces.

They include the B-2 Spirit strategic bomber, the E-8C Joint STARS surveillance aircraft, the RQ-4 Global Hawk, and the T-38 Talon supersonic trainer.

The U.S. Army uses Northrop Grumman’s RQ-5 Hunter unmanned air vehicle. And the Navy uses Northrop-built aerial vehicles such as the BQM-74 Chukar, the MQ-4C Triton, the C-2 Greyhound, the E-2 Hawkeye, and the EA-6B Prowler.

And thanks to a pending purchase of Orbital ATK Inc. (NYSE: OA), Northrup Grumman is also poised to dominate the missile market. Look for spending in this area to grow 25% by 2019 (compared to 2017) to $9.92 billion.

The Pentagon’s Missile Defense Agency’s five-year plan projects $46.7 billion in spending through 2023, $13.7 billion more than the Obama-era plan that covered the five years through 2022.

All this sets the stage for rising profits. Look for Northrup Grumman’s adjusted earnings to grow from $3.77 billion in 2017 to $4.92 billion by 2020.

As you can see, a rising defense budget should help all of these defense suppliers deliver sharp gains in sales and profits.

But there’s one more defense firm that will soar even further than all these companies – thanks to what I’m calling the “Era of Hyperpower.”

Right now, I’m putting the finishing touches on a report about that company – and a full series of reports about smaller, faster-growing military contractors.

Defense should play a crucial role in your tech portfolio if you want to make the sort of money that can create a secure future for yourself – and your loved ones.

So I’ll show you how to get those reports in the next week or two. Watch for it.

And I’ll see you back here soon.

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