The Pentagon and the US defense industry recently scored a massive budget victory that has largely flown under the radar.
And what really makes it noteworthy is the fact that, in such a deeply divided nation, such a big increase in defense spending garnered amazing bipartisan support.
The roughly $778 billion defense authorization act cleared the House last month with a lopsided vote in which a stunning 360 members voted yes as opposed to 70 nos.
That’s a 5-to-1 ratio in favor of supporting the nation’s fighting forces and defense contractors.
And in the Senate, the measure was even more lopsided. It passed 88-to-11 for a 7-to-1 margin of victory.
The votes come as we see a growing realization that the US faces rising geopolitical and military threats for an ascendant China and Russia and must.
And I’ve identified a contractor that’s positioned to benefit from the 5% Pentagon budget increase that goes along with this new bill.
The firm more than doubled the market’s returns last year and has more upside ahead…
The Global Standoff
Now then, the Pentagon budget made it through Congress in the middle of last month with very little attention.
No doubt that’s in no small measure due to a heavier media focus on inflation and Omicron.
It’s also partly because the act actually broke heavily with the Biden Administration’s original plan. That budget wouldn’t have kept pace with inflation.
Ultimately, members of both parties decided that now is no time to skimp on the nation’s defense as China and Russia step up their challenges.
Just as the new fabless semiconductor companies are accelerating market share, China has begun ramping up its military pressure on Taiwan, when the world’s most important chip foundries are located. Access to the South China Sea shipping has also become a point of tension as well.
Simultaneously, Russia and China have formed a cooperative defense agreement. North Korea somehow has announced it now has hypersonic missile technology, and China’s efforts in space are accelerating.
In the meantime, Russia is threatening an attack on eastern Ukraine and is now mobilizing troops in Kazakhstan.
These were key reasons that Congress decided we need more money in the R&D side of the US defense budget as well as building stronger defense coalitions in the Asia Pacific region.
They are also the key reasons why I see a huge opportunity for Textron Inc. (TXT).
Most of the big money in the new defense bill goes to countering China’s efforts to project power over the geographical region around its own territory.
It’s also very active in acquiring key strategic resources in developing nations around the world which disrupts the current status quo of global power projection.
But aside from focused China containment efforts, which include the Pacific Deterrence Initiative, an increase in shipbuilding and military base construction, not to mention the huge increase in R&D spending. The latter increase means more new weapons platforms and systems.
And new tech for land and sea operations is a very exciting prospect for one defense stock, in particular, Textron Inc. They are a conglomerate with a history that dates back to 1923.
Yet another aspect of making sure that America’s fighting forces have the support they need consists of making sure they have the best information technology available to provide them with updated battlefield information.
One company that is working heavily in realizing this kind of military display technology is also invested in one of the biggest new trends in the civilian technology market, the metaverse.
To be clear, this is a market that could be worth $800 million by 2024, and you can see exactly what I mean right here.
This company builds everything from Hawker, Beechcraft, and Cessna aircraft to golf carts (E-Z-Go) and other systems (Jacobsen, Arctic Cat, Cushman, and Kautex are just some of the brands in its collection).
But a lion’s share of its revenue comes from its defense operations. It’s a key niche player in a variety of sectors including cutting-edge fixed-wing and rotor aircraft to autonomous vehicles and ground-based strategic deterrents.
The firm’s fixed-wing division is a perfect complement to its civilian Beechcraft and Cessna lines.
Consider that its T-6 trainer and its brawnier AT-6 light attack planes have been used to train allied air forces around the world. The AT-6 is especially valuable in drug interdiction and in difficult remote terrain where the plane can operate better than larger attack planes.
Then there’s the Scorpion, a jet that provides both ISR (intelligence, surveillance, reconnaissance) and strike capabilities.
Textron also owns Bell Helicopter and some of the most storied helicopter and rotor-powered vehicles ever built. The Bell Huey Cobra was a legendary helicopter for much of the latter 20th Century. And the V-22 Osprey is a product of Bell’s engineering vision.
Textron also owns the Howe & Howe brand. H&H is famous for its cutting-edge robotic land vehicles for extreme conditions and its Lycoming Engines division powers over half the world’s general aviation fleet.
This combination of a solid civilian portfolio and a significant defense portfolio is a great twofer for investors looking to capitalize on both the economic rebound and a restructuring defense sector.
And Textron’s stock’s performance certainly reinforces that view. Last year, it gained some 57%, more than double the S&P 500’s 26% gain. Right now, the stock is up 63% in the past 12 months yet it’s trading far below the average PE for the S&P 500.
And there’s still plenty of upside ahead.
Let me be candid. Over the past three years, earnings growth was weak. Some of that was pandemic related, some election-related, some sector related.
But that changed in the most recent quarter when Textron posted 60% earnings growth. That was what Wall Street analysts expected for the full year.
Just to be conservative, let’s cut earnings expectations in half. That’s still an earnings double in as little as 2.5 years.
So, a company like Textron isn’t just defending America. It’s safeguarding your portfolio as well.
Cheers and good investing,