WASHINGTON – The election of Donald Trump as the next President of the United States should give a boost to the defense industry, although one analyst warns there may be new challenges that arise in the international market.
Stocks for defense firms, including Lockheed Martin, Raytheon, Northrop Grumman and General Dynamics jumped between five and seven percent the morning after the election, a sign of early investor confidence that the Republican control of the White House and both chambers of Congress will mean boom times for the military-industrial complex.
Byron Callan of Capital Alpha Partners believes a Trump White House, combined with a GOP-controlled House and Senate, should mean the next budget is "at least $18 billion more for FY17 than the [Obama] Administration's request, with $10 billion or more of that going to investment. Thus, FY17 investment budget authority could be up 2%-3% from FY16, not the flat comp we expected."
Jim McAleese, a well known industry analyst, predicts a jump in across the board funding, including an increase of $9-18 billion for Overseas Contingency Operations (OCO) funding and moderate top-line funding for the next budget.
"At the very least, investors perceive that Trump presidency will preempt the potential -$25B cut to top-line DoD funding that would otherwise occur under 2018 Sequester," he wrote to Defense News. "Additionally, Investors are generally expecting ≈+3-4% potential top-line 2018 defense growth as well."
Industry insider Loren Thompson agrees that the budget is likely to increase, although it will have to be worked into the broader Trump economic strategy.
"The larger question is how Trump’s defense priorities will be reconciled with his plans to cut taxes, protect entitlements, and invest in infrastructure," Thompson wrote in a column for Forbes.com. "Those commitments will inevitably impose some limits on how much he can expand investment in new military equipment. However, even on that front the news is mostly positive for defense contractors, because Trump wants to slash the corporate income tax rate and bolster U.S. manufacturing — an area where aerospace and defense companies already stand out as top employers and exporters."
Among the winners predicted by Thompson – companies involved in the modernization of the nuclear triad, those that build naval vessels (Trump has pledged to increase the Navy to 350 ships), and industry firms that equip the Army and Marine Corps, both of which Trump has said he wants to expand.
McAleese concurred that shipbuilders General Dynamics and Huntington Ingalls, as well as companies like Lockheed and Raytheon which provide combat systems for naval vessels, are early winners. Another winner he sees, also predicted by Thompson, is the F-35 joint strike fighter, which McAleese predicts will now be free from concerns the program could be cut to pay for the coming nuclear modernization wave. And if Trump follows through on plans to expand the Army, companies that service the ground force could see a big boost after years of lagging behind other services.
"At least 60% of any additional Army funding would likely be consumed in soldier pay, plus training and readiness, but some modest growth of Army investment accounts for combat vehicles (GD, BAE), wheeled tactical vehicles (Oshkosh), helicopters (Boeing, Sikorsky), and some targeted network priorities" could be in play, McAleese wrote.
Callan adds that the border security market is likely to grow as well. He highlights Elbit Systems as one that may be a particular winner in that category, especially as the reality of building a physical wall along the border with Mexico becomes apparent to the new administration.
However excited industry may be in the short term, Callan warns that there may be signs of danger in the long term.
"A populist President may be less tolerant of cost overruns on major weapons systems, and greater use of fixed-price contracts might entail more risk for the sector," Callan wrote. "Congress should also push for more acquisition reform, though it remains to be seen how outreach to Silicon Valley fares in a Trump administration."
In addition, Callan warns the international market may grow cold to US exports if Trump holds to some of his campaign statements.
NATO nations may look to spend more on defense but will focus that investment internally, given uncertainty about the US-Russia relationship going forward and Trump’s oft-repeated statement that NATO partners need to be paying for their US protection, Callan believes.
In addition, if Trump attempts to move forward with a ban on Muslim immigration to the US, nations in the Gulf and Asia may look elsewhere for their equipment.
The Aerospace Industries Association (AIA) congratulated Trump with a Wednesday morning statement noting that members of his campaign sat down with AIA in June to discuss key issues.
Updated 11/9/16 at 1:04 PM with comment from McAleese
Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.
