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Declining Outlook for Aerospace and Defense Stocks following US Elections

Nov 13, 2018

 

  • Aerospace and defense stocks have performed well since the 2016 US elections that resulted in Republican control of the executive and legislative branches. Since US elections on November 8th, 2016, Boeing (BA) has generated a total return of 149.62%, United Technologies Corporation (UTX) has generated a total return of 24.50%, Lockheed Martin (LMT) has generated a total return of 27.52%, and Northrop Grumman Corporation (NOC) has generated a total return of 20.64%, as seen in the chart below.
     
  • A Republican majority in both legislative bodies of US Congress paired with a Republican Presidential administration has created a favorable environment for aerospace and defense stocks over the last two years. In 2017, US defense spending increased from USD$584.8bn in 2016 to USD$590.2bn in 2017.  In August 2018, the US Senate voted in favor of a final defense budget package of USD$717.0bn in 2018
     
  • The 2018 US mid-term elections resulted in Republicans maintaining their majority in the Senate while the Democrats took control of the House of Representatives.
     
  • Although it is unlikely that a split majority in US Congress will result in a defense budget decrease, it does mean that the US defense budget has likely topped out until the 2020 US elections.   
     
  • Stagnant US defense spending will lead to lower growth prospects for US aerospace and defense stocks’ revenue with so many aerospace and defense companies relying on government contracts to drive their top-line.
     
  • United Technologies is the least exposed to risks associated with a fluctuating US defense budget, with only 5% of annual revenue stemming from US government contracts. Lockheed Martin is the most exposed to risks associated with US defense spending with 89% of annual revenue being generated from US government contracts.
     
  • US aerospace and defense stocks face additional risks associated with the US budget, as US Congress must approve a deal to raise the debt ceiling by March 1st, 2018 -- if US Congress cannot raise the debt ceiling by March 1st, the US government will shut down indefinitely.  
     
  • Of the four aerospace and defense stocks highlighted in this analysis, three are rated ‘Top Buys’ -- Northrop Grumman (NOC) is rated “Top Buy” in our US Industrials Global Top Stock Ideas, United Technologies Corporation (UTX) is rated “Top Buy” in our US Industrials Global Top Stock Ideas, and Lockheed Martin (LMT) is rated “Top Buy” in our US Industrials Global Top Stock Ideas.

 

Source: Bloomberg