The Trump administration's call for a $54 billion boost to defense spending might be a money-making opportunity for investors.
The White House on Thursday released its 2018 budget blueprint, calling for a sizable increase in Department of Defense spending while proposing cuts nearly everywhere else. While the move was widely anticipated weeks ago, there may still be quite a bit of upside ahead for the companies that stand to benefit from the boost should it be approved by Congress.
"The sentiment is baked in in terms of, yes, now we're entering into a more positive environment for defense stocks, but what's not baked into the stocks right now is the actual execution," said Jim Corridore, director of industrials equity research at CFRA Research in New York.
Many defense companies have gone through a five-to-10-year period with limited revenue growth, and as a result, they've streamlined their organizations, cut costs and bought back stock. If Trump's proposed defense spending boost gets through Congress, it could make a major difference.
"We see any incremental revenues leading to major leverage to the earnings-per-share-line," said Corridore.
"Clearly the military and homeland security, and by extension defense contractors, cybersecurity-related firms and vendors like construction and heavy equipment makers which would help to build the border wall, are the winners of the president's proposed spending plan," said Mark Hamrick, senior economic analyst at Bankrate.com.
Trump's budget gives a specific nod to Lockheed Martin (LMT) in making specific mention of investments in its F-35 fighter jets. He clashed with the defense company at the start of the year over the pricing of the jets but has apparently struck a deal with it since.
Lockheed Martin was the largest single contractor for the U.S. government in 2015, according to Federal Procurement Report data, bringing in more than $36 billion in federal contract obligations. Shares of Lockheed traded down slightly mid-morning Thursday.
Other defense companies that could reap the benefits of a defense spending boost include Raytheon (RTN) , General Dynamics (GD) , Rockwell Collins (COL) , Boeing (BA) , Level 3 Technologies (LLL) and Northrop Grumman (NOC) .
"These companies are seeing more contracts being offered up, and I think now is the time to buy the stocks," said Corridore. "This is a historic change in government priorities."
Shares of Lockheed, Raytheon, General Dynamics, Level 3 and Northrup Grumman all fell in Thursday morning trading. Rockwell Collins rose slightly, and Boeing shares were little changed.
To be sure, that Trump will get his way on his 62-page "skinny budget," a fuller version of which is set to be released in May, is no guarantee. It is subject to approval by Congress.
"We expect a battle royal in Congress over this proposed budget reflecting 10% cuts in non-defense budgets, which many view as a non-starter and see this as dead on arrival," said Baird Equity Research analysts in a note on Thursday. They added that directionally and on a whole-dollar basis, "defense spending is still grinding higher," which is a positive for defense stocks.
Goldman Sachs (GS) analysts in a note on Thursday said that Congressional appropriations bills will likely require 60 votes -- in other words, cooperation from at least eight Democrats.
"Assuming Democrats object, it seems unlikely that the full extent of the proposed cuts to domestic agencies will be approved, which would lead to a smaller increase in defense spending and/or a smaller cut (or increase) in total congressional appropriations than what the President proposes," they said.
There are also those who think Trump isn't proposing enough. Senator John McCain said the defense topline "will not be sufficient to rebuild the military" in a statement. "It is clear that this budget proposed today cannot pass the Senate. Moving forward, it is imperative that we work together to reach a bipartisan agreement that provides sufficient funds to rebuild the military," the Arizona Republican said.
In a message to Congress contained in the budget proposal, President Trump writes his call for increased defense funding is "vital to rebuilding and preparing our Armed Forces for the future." The blueprint repeals the defense sequestration that occurred under the Budget Control Act of 2011 and ups spending across various military branches and initiatives.
"This is a hard-power budget," said Office of Budget and Management Mick Mulvaney in a chat with press on Wednesday. "We're not throwing money after a problem and claiming that we have fixed it."
Trump also requested an additional $30 billion for the Department of Defense 2017 budget, in a letter to Speaker of the House Paul Ryan explaining that he believes it is necessary to "rebuild the U.S. Armed Forces and accelerate the campaign to defeat the Islamic State of Iraq and Syria (ISIS)."
Also on Thursday, the president released the names of a number of individuals he plans to nominate to the Department of Defense, including former Bush administration appointee Robert Daigle, former Senate Armed Services Committee staffer Elaine McCusker and Patrick Shanahan, currently a senior vice president at Boeing.