President Sanders & defense; EU delays Raytheon-UTC ruling; More Marine One helicopters; and more.
Ask the CEO of a defense company about the prospect of defense spending slowing or flattening and the answer is typically this: The number of threats is growing and there’s bipartisan support for military spending. You could also throw in a line about Congress being supportive of Company X’s programs.
Defense spending in 2021 is expected to flatten or decline, even if President Trump is reelected. But what if a Democrat wins?
With such a diverse group of candidates, from far-left leaning to moderate, it’s tough to say, but Wall Street analysts are starting to opine on the topic as Sen. Bernie Sanders, a self-described Democratic socialist, has emerged as the frontrunner going into next week’s Super Tuesday primaries.
“Just as Trump didn’t moderate his views and behavior, we doubt that the 78-year old Sanders would move to centrist positions if elected,” Byron Callan, an analyst with Capital Alpha Partners, wrote in a Feb. 26 note to investors.
“He has stated that 1) the U.S. spends too much on defense, compared to other countries. 2) the U.S. has to end ‘endless wars,’ and 3) he favors diplomacy over military power. Sanders also has been highly critical of U.S. sales of weapons used in Yemen and Feb. 25 comments on [Benjamin] Netanyahu may suggest more pressure on U.S.-Israeli defense sales if he were elected.”
Callan predicts a Sanders administration would be “tougher on contractor returns on investment, progress payments, and risk and cost sharing.”
Wall Street is betting on Trump winning reelection against Sanders.
“We could see a point in 2020 either before the election, if Sanders won the nomination and if he polled well against Trump, or as a result of the election, where defense sentiment turned sharply negative,” Callan wrote. “The issues that analysts and planners would then have to navigate are 1) who Sanders nominates for DoD and who he chooses as national security advisor and 2) what changes his Administration proposes for the FY22 budget which will have been prepared by the Trump Administration.”
After a Citi investors conference in Miami last week, analyst Jon Raviv wrote that the “defense conversation is still all about growth visibility as budgets flatten out. This focus is unchanged vs. last year’s conference, although there’s now a bit more urgency with this administration’s first flattish budget with an election right on the horizon.”
The Trump administration’s fiscal 2021 defense budget request is $741 billion, in line with a spending deal reached with Congress last year and down 1.1 percent from the 2020 budget in real terms. While defense officials have said the Pentagon needs 3 to 5 percent annual growth, its 2021 budget request projects roughly 2 percent growth annually for the next five years.
Still, no one is hitting the panic button yet.
“We did not sense election worries just yet since (a) defense is generally bipartisan and (b) ‘it’s still early,’” Raviv wrote.
We’ll see what Wall Street thinks after Super Tuesday.
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EU Delays Decision on Raytheon-UTC Merger
Raytheon and United Technologies have offered undisclosed concessions to European regulators in order to gain approval for their planned merger, Reuters reports. The companies — which are expected to combine early in the second quarter — announced they would sell Collins Aerospace’s GPS business and Raytheon’s Airborne Tactical Radios business to BAE Systems to get U.S. regulators’ approval. The European Commission is now expected to decide on the merger by March 13, two weeks later than planned.
L3Harris to Sell Instrumentation Business
L3Harris Technologies will sell its Applied Kilovolts and Analytical Instrumentation business to Massachusetts-based Adaptas Solutions, “a leader in mass spectrometry and analytical instrument contract design and manufacturing.” Terms of the deal were not disclosed. It’s the latest divestiture by L3Harris, which recently announced it would sell its airport security business to Leidos for $1 billion.
New SM-2 Interceptor Flies
Raytheon’s SM-2 missile production line in Tucson, Arizona, is hot for the first time in seven years. A newly built missile flew for the first time, successfully engaging an airborne target, its maker Raytheon said this week. Raytheon said demand from U.S. allies led to the restart of production of the missile, which can target aircraft and ships. It will start delivering some 280 missiles to Australia, Japan, South Korea and the Netherlands later this year.
Palantir, BAE To Compete for Army Intel Deals
There’s $823 million up for grabs over the next seven years as part of the latest deal to update the Army’s Distributed Common Ground System. Six companies bid for the work and the Army chose Palantir and BAE Systems, which will now compete for individual orders.
Pentagon Order 2nd Batch of Marine One Helicopters
That brings the total order of VH-92 presidential transport helicopters to 12 of a planned 23. The Navy placed the latest order, which totals $470 million, with Sikorsky on Feb. 19. “Sikorsky has transferred five VH-92A helicopters into government test with the sixth completing modification and entering into government test this spring,” Sikorsky parent Lockheed Martin said in a Feb. 20 statement. “The VH-92A program is on track to enter Initial Operational Test and Evaluation later this year.” The VH-92 made its public debut during President Trump’s July 4 festivities last year. All of the new Marine Ones and development are expected to cost $4.9 billion, according to Pentagon documents. By comparison, the two new Air Force One aircraft are expected to cost $5.2 billion.
New Air Force CSAR Helicopter Named
The U.S. Air Force’s new Sikorsky-made HH-60W combat search-and-rescue helicopter will be called the “Jolly Green II,” Secretary Barbara Barrett announced Thursday morning at an Air Force Association conference in Orlando, Florida. The HH-60W will replace 19080-vintage HH-60G Pave Hawks.
Foreign Arms Sales Update
So far, the State Department has cleared more than $21 billion in sales in fiscal 2020, which began in October. The State Department this week cleared three arms deals worth up to $710 million. Among the sales OKed:
- Four Beechcraft AT-6 Attack Planes for Tunisia, valued at $325.8 million;
- 16 Raytheon-made MK-48 Mod 7 Advanced Technology torpedo conversion kits for the Netherlands, valued at $85 million.
- Artillery command, control and communications equipment, largely made by Raytheon and L3Harris Technologies, valued at $300 million.
The pace of sales are better than at this point last year, but behind the record levels in fiscale 2017 and 2018, according to Cowen’s Roman Schweizer. “Given last year's late surge, it's too early to make a prediction about this year,” he wrote in a Feb. 3 note to investors. “We see a number of cases as positive for Lockheed Martin, including Singapore's potential 12-plane F-35 & Australia's Aegis buys.”
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