Even if you can’t stand President Trump, you have to give him credit where it’s due.
We haven’t seen anyone in the White House since Ronald Reagan who is such a strong backer of the Pentagon. Trump campaigned on rebuilding the military and made it a hallmark of his administration.
Yet while Big Media was giving saturation coverage to the Trump impeachment hearings, the defense budget deal was in the works.
The net result was a paucity of news about the Fiscal 2020 Pentagon budget that sailed through the House on a 377-to-48 vote.
This is a $738 billion bill. That’s a lot of work for defense contractors, both large and small. And it completely slipped past everyone’s radar.
Well, almost every one…You can bet that yours truly was busy searching for defense winners.
Cold Cash as Events Heat Up
Now then, I have to say that this whole impeachment thing was a big loser. It all went down amid partisan squabbling and intense media coverage.
I’m sure our adversaries were playing close attention in the hopes that a president who will go down in history as a major defense hawk got booted out of office.
Behind the scenes, however, they were no doubt taking note of Trump’s continued defense buildup. And that recent showdown with Iran certainly commanded attention.
Not two days into the new year, Iraqis, led by Iranian-backed militias stormed “the Emerald City,” the massive Green Zone that houses the U.S. Embassy in Baghdad.
In response, the president authorized a drone attack to take out the number-two leader in the Iranian political and military leadership. He has been involved in a number of armed conflicts, oftentimes using proxy armies and militias to hide his fingerprints.
Iran has vowed retaliation. But I believe the odds are nil that the rogue regime wants to start a shooting war with the U.S.
But just in case they do, Trump has a plan in mind – stronger defenses, especially for the Navy. That unit is getting the biggest spending package for shipbuilding in 20 years.
Also, $9.6 billion has been devoted to cybersecurity for the military and government. And $14.1 billion for projects that include Trump’s new Space Force to protect our satellites from the Chinese and Russians buildups in outer space.
All this is at home. But bear in mind, Trump is upping sales to our foreign allies. These new weapons systems are more than just a revenue generator for the industry.
They allow the U.S. to project power around the world without committing boots on the ground since those systems usually are supported by training and maintenance from US firms and military advisors.
Trump is also beefing up Pentagon research and development with the biggest increase in 70 years. This is where we get the next generation of advanced systems like drones, directed energy weapons, hypersonic missiles, artificial intelligence, and robotics.
A Winner in the Making
One company that’s setting itself up to profit from these trends is a Reston, VA-based tech and IT company called Leidos Holdings Inc. (LDOS).
This company started as a firm called Scientific Applications Incorporated in 1969. It was based in the DC area to try to land government contracts for scientific research into sectors where the government didn’t have a lot of in-house experts.
Its first contract was to analyze nuclear weapon effects. And from there it was off to the races.
By the next year, it was working at Los Alamos exploring radiation-based therapies on cancers. Then it was a contract at the Air Force Weapons Laboratory working on electromagnetic weapons.
It got its first international contract with the Kuwaiti Defense Forces in 1976. In ’79 it was a key partner in developing a clean-up strategy for Three Mile Island, America’s largest nuclear disaster.
In 1984, it changed its name to Scientific Applications International Corporation or SAIC. Yes, there were plenty of other landmarks along the way.
But two key events created today’s operation. In 2013 SAIC merged with Leidos and took that company’s name. Three years later, it bought two units from Lockheed Martin Corp. (LMT) to that Leidos could scale up for greater sales growth.
Yet the story doesn’t end there, it’s just the beginning. Just a couple days before the defense bill was signed, Leidos announced it was buying a major player in the aerospace sector, Dynetics, for $1.65 billion.
This sets Leidos up as one of America’s premier aerospace and defense-tech firms, either as a secondary contractor to larger defense companies or on its own.
Already on a Roll
The merged firm has a strong background in providing advanced communications systems along with intelligence gathering and surveillance of enemy forces.
The firm is also particularly strong in cybersecurity. That helps it focus on a top priority for the Pentagon, which has its own Cyber Command devoted to protecting our computer networks against hostile actions.
Leidos is a company that knows the Defense Department well. Of its 10,500 global workers, some 38% are military veterans. The firm has roughly $10.2 billion in yearly sales with than one-third coming directly from defense and intelligence agencies.
It should do very well under Trump’s naval buildup. After all, Leidos is pioneering unmanned ships.
The company recently provided the artificial intelligence-driven software for the new Sea Hunter, a futuristic vessel that can ply the oceans without a human crew.
So, the recent Dynetics deal comes at a great time. That should add a huge boost to Leidos’ expansion plans.
I’m projecting annual earnings growth over the next three years of roughly 15%. At that rate, earnings should double in less than five years.
With Dynetics in the fold, it will probably get there faster. But I like to be conservative in my forecasts.
Add it all up and you can see that this is a great time to invest in Trump’s defense buildup.
And Leidos is one of those stocks you can count on to increase the value of your holdings for many years to come.
Cheers and good investing,
Michael A. Robinson