Author Topic: Defense contractors  (Read 2972 times)

Xerxes

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Re: Defense contractors
« Reply #20 on: June 23, 2020, 06:48:29 PM »
I recently (and today) added to NOC. They are sort of the sole bidder on two huge contracts coming up - the B-21 stealth bomber and the GBDS (intercontinental nuclear missiles). The US ground based nuclear missiles are dated and probably need to be replaced (unless the US is shelving this which is unlikely) since it pre Cold War and was out in place in the 1970ís. Twos programs are $60-70B in Size which is substantial for ~$36B company like NOC.

Other stocks in my watchlist are $LHX (strong in sensors and electronics ), Shipbuilder HII (cheap, but somewhat of a low tech metal fabricator ) and $LMT.

Spekulatius, Great pick !
Northrop is the best of the bunch, however beware that for GBDS there is reason why Boeing dropped out and the reason was not it being preoccupied with the MAX' woes. I believe the model that Pentagon is going with for GBDS is one that it will own the underlying technical baseline of the GBDS program as oppose to the contractor owning it. Meaning that the best part of the contract which is the 50+ year aftermarket can be re-distributed by the Pentagon to other parties (which may or may not include Northrop).

On the other hand, Boeing went hard for the TX fighter trainer, (and got it) because it knew that it could sell what is develops through taxpayer money through international markets. i.e. (the F-16 model with Lockheed). For GBDS, Northrop has no international market for these Doomsday weapons and if it cannot own the technical baseline (thus not owning the Aftermarket), it remains to be seen how profitable that "captive" program will be even if it is the sole bidder. The +$50 billion value for GBDS its huge, but most of it is not front-loaded.

But i very much like Northrop, anyways. I think a combination of Northrop, Lockheed, General Dynamics and Raytheon Technologies gets one covered on the nuclear triad and then some. The last two are perhaps cheaper due to their exposure to business and commercial aviations.


Spekulatius

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Re: Defense contractors
« Reply #21 on: June 24, 2020, 04:07:08 PM »
I recently (and today) added to NOC. They are sort of the sole bidder on two huge contracts coming up - the B-21 stealth bomber and the GBDS (intercontinental nuclear missiles). The US ground based nuclear missiles are dated and probably need to be replaced (unless the US is shelving this which is unlikely) since it pre Cold War and was out in place in the 1970’s. Twos programs are $60-70B in Size which is substantial for ~$36B company like NOC.

Other stocks in my watchlist are $LHX (strong in sensors and electronics ), Shipbuilder HII (cheap, but somewhat of a low tech metal fabricator ) and $LMT.

Spekulatius, Great pick !
Northrop is the best of the bunch, however beware that for GBDS there is reason why Boeing dropped out and the reason was not it being preoccupied with the MAX' woes. I believe the model that Pentagon is going with for GBDS is one that it will own the underlying technical baseline of the GBDS program as oppose to the contractor owning it. Meaning that the best part of the contract which is the 50+ year aftermarket can be re-distributed by the Pentagon to other parties (which may or may not include Northrop).

On the other hand, Boeing went hard for the TX fighter trainer, (and got it) because it knew that it could sell what is develops through taxpayer money through international markets. i.e. (the F-16 model with Lockheed). For GBDS, Northrop has no international market for these Doomsday weapons and if it cannot own the technical baseline (thus not owning the Aftermarket), it remains to be seen how profitable that "captive" program will be even if it is the sole bidder. The +$50 billion value for GBDS its huge, but most of it is not front-loaded.

But i very much like Northrop, anyways. I think a combination of Northrop, Lockheed, General Dynamics and Raytheon Technologies gets one covered on the nuclear triad and then some. The last two are perhaps cheaper due to their exposure to business and commercial aviations.

Xerxes, thanks for the commentary on the GBDS program, I wasn’t aware of this. Nevertheless, I think NOC is doing a good move here, as they stated in a CC that they want to get into the missile business and don’t mind spending Capex to do so. That makes sense to me.

I remember when Grumman and Northrop merged and both were considered dogs then, but they have done quite well. Generally, I found that mergers in defense often work out well, which also leads me to LHX (merger product of Harris and L3). I kind of know them in Lynch sort of way since during my carrier , I often work to supply defense companies and those are well known to me. L3 itself was a rollup, but they did quite well concentrating on sensors and electronics and I think the merger with Harris is a winner too. So I bought some shares in today’s weak price action. LHX is not a prime contractor, but they supply critical components and subsystems and do so with great margins.

I know that Mr Market is concerned about a democratic victory here but quite frankly, I think the outlook for US defense contractor is quite OK here. Both Russia and China are reducing manpower of their marked forces, but vastly increase their offensive capabilities and I expect the US will have to counter this, no matter who is in charge.

i expect the military of the future to be vastly smaller (at least in terms of boots on the ground), but getting increasingly more technical and sophisticated and I think it will shift the defense budget from salaries to R$D and Capex, which is good for defense contractors.

About the worst thing they can happen for defense contractors is a low tech war against terrorist like we had from 2001 to 2014 that sucks up the budget from salaries , contractor work and bribes in hostile countries and negate the wear and tear in existing equipment (which is low margin work), instead of working on new toys.
« Last Edit: June 25, 2020, 04:32:12 AM by Spekulatius »
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scorpioncapital

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Re: Defense contractors
« Reply #22 on: June 25, 2020, 04:07:08 AM »
That's why I think you should invest in defense cos with top technology and teams. And Space. I'm not sure if there is a rule saying they can't do commercial work. E.g. BA is mostly commercial but some government %. The military contractors are mostly government with some %, more or less, commercial. Also I am not sure exactly how they benefit from their work. Are they like Universities where they license , spin off or sell their technology? Or is it one time contracting gains? Maybe they spin-off their young entrepreneurial businesses? Although not sure if these companies can ever be said to be young and entrepreneurial.

Xerxes

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Re: Defense contractors
« Reply #23 on: June 26, 2020, 08:30:42 AM »
Spekulatius,
Looks like we have the same background more or less.
Agreed that the gems in the A&D are the rollups that happen in the shadow of the giants with the headlines.

I recommend you add this Podcast to your roster, if not there already. There is wealth of info there. I have been reading Aviation Week for 10 years+.
I love the magazine and get the hardcopy at my door. Podcast => https://aviationweek.com/check6

Specifically, on Northrop Grumman and GBDS, here is the title. Great stuff to listen to while jogging.
https://aviationweek.com/defense-space/podcast-nuclear-modernization-point-no-return

On L3, itself it was a minor spinoff from Lockheed, with "L" from the Lockheed being one of the three "L"s in L3. The other two "L"s being individuals/management when L3 was created. If you are interested, one of the other "L" started his second investment vehicle, doing roll-ups in electronic/defense (i.e. C4ISR) etc.

Here is the related Podcast => https://aviationweek.com/air-transport/podcast-challenges-southwest-spacex-c4isr


« Last Edit: June 26, 2020, 08:36:00 AM by Xerxes »

Xerxes

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Re: Defense contractors
« Reply #24 on: June 26, 2020, 08:39:44 AM »
On elections, i don't think it will be a factor, in the "pivot" back to great power competition.
U.S. national security is far less concerned with the Persian Gulf, now that U.S. is the top oil producer.

The long term trend will be that of dis-engagement from the Gulf region, and subcontracting Saudi and Israel to do their bidding.
« Last Edit: June 26, 2020, 08:54:50 AM by Xerxes »

villainx

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Re: Defense contractors
« Reply #25 on: June 26, 2020, 04:11:42 PM »
Aftermarket suppliers, software, as well as ancillary military tech may be worth considering. 


Spekulatius

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Re: Defense contractors
« Reply #26 on: June 26, 2020, 05:03:11 PM »
On elections, i don't think it will be a factor, in the "pivot" back to great power competition.
U.S. national security is far less concerned with the Persian Gulf, now that U.S. is the top oil producer.

The long term trend will be that of dis-engagement from the Gulf region, and subcontracting Saudi and Israel to do their bidding.

I agree. This decade, the focus will be to counter the Russians and most importantly the Chinese.

Just to name one example, the Chinese got their own GPS satellite network up and running. This is of strategic importance to become independent from the US for both commercial as well as for military uses for the Chinese.
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