The world’s largest customer, the US Government, spends about 2 billion dollars a day in goods and services. With Aerospace & Defense (A&D) taking the lion’s share, the government’s spending policies can have a heavy impact equity prices, particularly for companies that provide goods or services to the military. In 2019, the A&D Index had another year of strong performance, which was expected, and falls in alignment with D&A outperforming the S&P 500 over the last three years*, with average annual returns for D&A at 22.86%; S&P500 14.83%.
For A&D, 2019 was primarily defined by continuous United States Government (USGOV) efforts for military modernization and technology development across spectrum. For many of the companies operating in this space this meant mergers, acquisitions, and divestitures in order to meet the needs of the US Department of Defense, and to be more competitive in price proposals for the contract arbitration process of the USGOV.
The 2020 budget for military spending increased to $738 billion dollars, $21B more than the previous year, an increase of 3%. This year, the projected A&D winners in this space will be those companies involved in Aircraft, Ships, and Missiles construction and development. Their success will be a combination of Domestic sales and deliveries, in conjunction with continued foreign military sales. Lockheed Martin’s F-35 is a great example of such a revenue stream, as they continue to reduce costs, increases margins, improve delivery, and pursue deals among US allies.
The Presidential Election, Space Command and NASA missions play a key in 2020 forecasts
Our 2020 outlook takes into consideration several factors, including the impact on A&D from the current Presidential election cycle. However, there are some other mitigating factors that could potentially insulate A&D from such a sensitivity, like the establishment of the Space Command. As the 6th Military Branch of the USGOV, it currently accounts for only a small portion of the budget. However, as it grows, expect its budget allocations to increase, along with their expenditures in A&D.
Another major factor is NASA’s 2024 moon landing mission that is being contested in Congress and in the USGOV. Current discussions include delaying the Moon mission to 2029 or foregoing the mission to bolster NASA efforts for a Mars orbit by 2033. In either case, NASA clearly understands that either course of action will require partnerships with the A&D sector in order to achieve the mission objectives; therefore, expect more expenditures within the Index.
Keep an eye out for the Fiscal 2021 expenditure budget in the coming months. Another increase is a positive indicator for the A&D sector, and further reassures smart investors that the earnings growth potential is there for the foreseeable future, and SCI will be your guide to the Winners.
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