These two I have a soft spot for as I was dead set on becoming an aerospace engineer and working at TRW as a kid.
Here's the setup, geopolitical tensions (cold and hot) are all over the frontpages daily; demand has increased markedly, and spending looks to be headed significantly higher.
Seems straight forward, can we as easily identify the conflict; I'd reckon it's foremost the incoming administration stateside. The bluster is one thing but changing policies on the larger programs (B-21, F-35, etc.) seem less likely. The second facet to this are all of the upstarts looking to disrupt the defense industry, they are what enable the talk from the new administration to ostensibly have teeth.
My read on this has two parts.. First, it is all just going to end up as incremental spending and the incumbents need not worry and in fact may benefit at the end of the day. Second, where there will be pressure are what's currently viewed as the easy money. The expendables, anti-air, anti-armor, artillery, etc.; these are the products where the upstarts can most readily disrupt things.
Think of it like the pharmaceutical industry where various chemotherapies are being replaced by ADCs (antibody drug conjugates) - which are basically 'smart' versions of the former. That said, militaries do need to restock what they've been using (and over time things age out in any case); and different countries will have different doctrines.
Maybe you restock your Javelins but over time start to mix in more XYZ's, same for artillery shells, etc.; the question circles back to a willingness to incrementally spend more today as there are two competing interests (restocking and staying relevant).
L3Harris and Teledyne probably need revisiting as it all revolves around sensors.
That's my thinking on the space and with regard to Northrop and Lockheed, both are off their highs 14% and 20% respectively (yet dramatically off their lows over the last several years), expectations (modeled and priced in) have cooled at touch.
Both have been in a cash crunch of sorts, basically fronting the US Government by continuing to fund production of programs. Which does bring with it the tail risk the new administration is waving around - will they be able to recoup today's costs.
The story has been simpler over at RTX (Raytheon) where their missiles/ interceptors have never been hotter; problem there has been all that cash generated going to an issue on the engine side.
Neither is cheap, though I wouldn't call them expensive either; the question on incremental spend is important - they have businesses beyond the blockbuster programs.
Things are all feeling quite neutral, recent events have injected some cause for pause; but ultimately, the secular tailwinds are stronger than ever.
Against this, only two areas within industrials have really 'worked' of late; defense and those focused on electrification - plus Parker Hannifin, they've been lights out from both sides. So, you always need to watch flows - should the industrial recession recede money may move to chase perceived low hanging fruit, etc..
Which is all to say, I like them and expect this to be a step up from 'invest and investigate'; probably starting with a real position and looking to add over time and price.
br. -john
p.s. i pegged the odds at 50-50 before looking through the financials
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