The United States elaborates on the most aggressive expansion of missile defense capabilities since the Cold War. It will take time for precise details of the plan to be drafted, but among defense companies there are some pretty clear winners – and a few potential losers – likely to get out of this new Pentagon push.
The New Missile Defense Review, unveiled in the Pentagon on January 17, attempts to move the US policy away from focusing on deterrence – the threat of conflict – and more active defense measures and specific technologies designed to counter threats. It launches some existing technologies but will require massive research and development costs to modernize these technologies and develop new ones, at present only theoretical capabilities.
The document is more a road map than a specific list of financing plans or shopping opportunities, and therefore it is too early to update business estimates estimates based on the plans. But it is bullish for the defense stocks because it shows a great need for investment and provides traces of who is best placed to capitalize.
Using the Tools in Place
Although the notification is new, the Pentagon has invested in missile defense for decades and the work done by Lockheed Martin (NYSE: LMT) and Raytheon (NYSE: RTN) makes these contractors good to be among the top recipients of this new push.
The Pentagon wants to consolidate its attack capabilities by better integrating these missile defense efforts. It requires continued investment in programs, including Lockheed's Terminal High Altitude Area Defense (THAAD) anti-ballistic system using a Raytheon-created radar system as well as Lockheed's Aegis Combat System, a collection of computer and radar technology designed for To track and guide weapons to destroy enemy targets. THAAD antiballistic system launches over water. ”
Raytheon's SM-3 IIA interceptor, currently designed to work against mid-range missiles, will also be tested against faster and higher altitude intercontinental ballistic missiles. The US is even considering equipping the Lockheed-made F-35 Joint Strike Fighters with a weapon that could destroy a ballistic missile during the launch phase, potentially opening up new missions and possibly more demand for the high-tech fighter.
The audit also notes the Pentagon's growing concern over hypersonics, missiles that reach high altitudes and travel at more than five times the speed of sound as well as maneuverable cross missiles capable of zigzag in flight and are therefore much harder to target. 19659002] Lockheed has won more than 1.5 billion. Dollars of hypersonic contracts in the last year, and the Pentagon, which justified one of the prices, said that "no other contractor has this level of design maturity" that estimating it would have cost the government more than $ 100 million in two-tiered development costs had it chose any of Lockheed's rivals.
Some aspects of the plan require technologies that are not yet viable so that the United States would take the controversial step in the installation of weapon systems in space. While spy satellites and sensors have been implemented for decades, moving toward placing actual weapons in orbit, while apparently inevitable, is controversial.
It's also far from safe. Expect the Pentagon to spend the next few years continuously testing and investing in research to determine the viability of space-based interceptors, including a range of lasers and more conventional rockets.
Much of this work to this point has been theoretical and what businesses do is largely classified. But missions like this are a major cause Northrop Grumman (NYSE: NOC) spent $ 9.2 billion. Dollars to buy Orbital ATK last year.
The Pentagon is also developing a new space-based sensor layer to supplement the US's existing detection capabilities. Congress endorsed funds to study and develop a fiscal policy system in 2019, hoping to democratize some new ability to detect and track missile launches by mid-2020.
Defense researchers are expected to consider a number of options, including massive and expensive military quality satellites, such as those already in orbit by the Pentagon, a cluster of smaller and cheaper satellites capable of providing wide coverage on the cheap or even sensor loads. linked to future commercial satellites.
While the exact path is unclear and prioritization of room sensors must create growth opportunities for a number of companies, including Boeing (NYSE: BA) and Harris (NYSE: HRS ) .
Movement detection capacity for the room would be a great relief for the US Navy, who complained that it was stretched thin because of the need to use its Arleigh Burke class of g uided missile destroyers equipped with Aegis combat system technology to provide better missile detection throughout the Pacific.
In theory, reducing the fleet's responsibility for missile detection will free ships for other missions. But it also makes it possible to weaken the fleet's case to expand its fleet by more than 25% to 355 ships. Naval officers would probably accept this trade-off, but it would eat in some of the bull's case for shipbuilders and Huntington Ingalls (NYSE: HII) and General Dynamics (NYSE: GD) ].
The Pentagon is in expansion mode, floating plans to quickly expand the air force and modernize the army's earth systems beyond the navy's desired buying bracket and a new emphasis on missile defense and space. But with budget battles on the horizon, it is hard to imagine that entire wishlists will be funded and lowered the Navy Fleet goal, while gradually reducing the branch's commitments, being a logical way to make the most of the money.
That is not to say that there is no growth in shipbuilding: Huntington Ingalls is likely to soon have a massive agreement to build two new carriers, and General Dynamics & # 39; new nuclear quartz submarines in the Colombia class are an important part of the nuclear triad. But if space systems can take on some of the missions currently made by destroyers, growth may not be as high as some had hoped.
Missile defense is a long-term trend
It is important to repeat that this document is a driving license and not a shopping list. It sets the framework for a long-term Pentagon budget call, but will not affect any contractor's bottom line in the quarter.
Nobody should go out and buy Lockheed Martin shares, expecting a near-time pop based on Pentagon's emphasis on missile defense. That said, long-term owners of Lockheed Martin and its brothers will comfortably see missile defense as a source of long-term growth for the sector.
Given the threat identified by the Pentagon, missile defense spending seems likely to increase in the coming years regardless of overall budget estimates.