Most defense stocks not outperforming the market; analyzing Trump’s tweets; up-armored coffee maker.
Something odd happened when I went home to Long Island for the holidays: the boisterous Christmas Eve dinner conversation among my 40 or so Italian-descended family members turned, at one point, to defense programs.
For the first time in years of covering this stuff, some stories I’ve been writing about and commenting on are in the national spotlight. This made for more substantive discussion than the typical “How’s DC? Ya know they’re all crooks down there.”
Much of the interest seemed to spring from President-elect Donald Trump’s tweeted complaints about the price tags attached to new Air Force One aircraft and F-35 Joint Strike Fighters. Why, my family wanted to know, does it cost so much to build new fighter jets, ships, and tanks?
These folks were not sympathetic to the argument that today’s weapons are far more complicated, from their stealthy skins to the high-tech equipment inside. Within their living memory, nearby factories turned out fighter jets and other military vehicles by the thousands. Grumman alone employed 23,000 people before its merger with Northrop, which shuttered most of the company’s presence on Long Island. Today, Telephonics is the largest defense firm there, employing just 1,200.
The people I spoke with — whether they voted for Trump or not — think the government is paying too much for weapons. While we in Washington often refer to tens of millions of dollars as “budget dust” in a $600-billion Pentagon spending plan, regular people don’t think that way. And it’s something every acquisition professional and corporate executive should keep in mind.
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Defense Stocks Not Doing Much Better Than Market
The conventional wisdom says Trump’s election is good for defense firms, thanks to the president-elect’s promises to rebuild the military — and buy more weapons. Indeed, defense stocks soared the day after the election. But since then, only a few of the largest defense companies’ shares have outperformed the market.
Let’s unpack this. Between Election Day and Jan. 3, the Dow Jones Industrial Average rose 8.9 percent, while the S&P 500 was up 5.9 percent. Over the same period, all 10 of the largest U.S. defense firms are up — but only Huntington Ingalls, General Dynamics, L-3 Technologies, and Boeing have beaten the Dow. United Technologies and Raytheon did beat the S&P 500, while Harris and Lockheed Martin gains were even with it. On the low end, Northrop Grumman is up 2.1 percent; Honeywell, 4.4 percent.
The biggest gainers were ship makers Huntington Ingalls (up 26.9 percent) and General Dynamics (up 15.1 percent). Trump has called for bulking up the Navy’s fleet warships, and service leaders themselves have said they need more ships and submarines.
New York-based L-3 Technologies — a firm that does lots of intelligence and integration work for the U.S. military — ranks third on the list, up 10.7 percent. Just before the election, the company announced it would buy the explosives trace detection business of Implant Sciences. (And on Dec. 31, it changed its name from L-3 Communications.)
Lockheed saw its stock take a hit last month after Trump criticized the F-35 Joint Strike Fighter.
In a recent note to investors, Byron Callan of Capital Alpha Partners took a broader view, comparing the performance of 39 companies with at least some defense revenues to the S&P 500 and S&P Europe 350. In 2016, he found, 25 of the companies outperformed the indexes.
“We ... have observed that large cap U.S. defense stocks generally outperform in presidential election years,” Callan wrote. “The rule was confirmed in 2016 and amplified by the Trump win and GOP retention of Congress. General Dynamics, L-3, Lockheed Martin, Northrop Grumman and Raytheon all bested the S&P 500.”
Analyzing Trump’s Tweets
Jim McAleese, who runs the Virginia-based McAleese and Associates consulting firm, has a great analysis about how Trump approaches business and how that might impact defense.
“Expect continued-use of targeted-tweeting, to tee-up issues directly to the American public, to then drive negotiated-outcomes,” McAleese writes, noting PEOTUS’ complains about the F-35 and a new Air Force One. “Trump values forced-competitions to drive down program costs...He is very frugal, constantly-looking for fraud/waste/abuse, to fund priorities on ‘net-neutral’ basis.”
Just before Christmas, we noted that Trump is now America’s arms deal negotiator, and how the Pentagon’s latest batch of more than 90 F-35s will be the first test of his skills.
The Joint Strike Fighter might only be the beginning.
“The fundamental take-away is that service chiefs & [managers] on the largest-programs, now have the potential to summon Trump’s personal-support in the event of long-term cost-curve impasse with major prime contractors,” McAleese writes.
As we pointed out just after the election, Trump will look to in-production projects. McAleese points out that these “shovel-ready” and “hot-production” manufacturing projects could drive job and GDP growth in the next two years, just in time for next big congressional elections.
McAleese also predicts Congress will pass a Pentagon supplemental spending bill between $26 billion and $40 billion in February or March. That will arrive before Trump’s own 2018 budget proposal, which is likely to come in April or May.
What to Watch
The confirmation hearing for James Mattis, the retired Marine Corps general nominated by Trump for defense secretary, is Thursday, Jan. 12. Also, we’ll be on the lookout for any other Pentagon nominations that might pop over the next week.
New Northrop Comms Chief
The Virginia-based firm announced Tim Paynter will replace Randy Belote as the vice president of strategic communications on Jan. 21. Belote plans to retire after 40-plus years in the aerospace and defense industry. Best line in Northrop’s press release announcing Paynter’s promotion: “Most recently he led communications and advocacy efforts for a significant business pursuit.” That would be, no doubt, the B-21 bomber program.
An Up-Armored Coffee Maker
When you’re on the battlefield, but don’t want to drink instant coffee, there’s now a ruggedized, single-cup brewer that uses Keurig K-Cup pods. No joke. It’s called the CoffeeBoxx and it’s made by OXX. Per their emailed pitch: “The COFFEEBOXX is designed to provide hard-working and hard-playing people with hot cups of premium coffee no matter who they are—builders, long-haul truckers, military service members, hunters, anglers, boaters, RVrs, overlanders, car and van campers, outdoor-event workers, and more.”
NEXT STORY: Trump is Now America’s Arms Deal Negotiator