THE HEDGEYE EDGE
Earlier this month, we added large-cap, low beta defense contractor Lockheed Martin (LMT) to the long side of Investing Ideas.
Here's what our seasoned Hedgeye/Potomac Research colleague and Senior Defense Advisor LtGen Emerson "Emo" Gardner USMC Ret. recently wrote in an institutional research policy note:
"With a bipartisan vote of 30-1, the Senate Appropriations Committee has released its FY17 defense spending bill report for action on the floor and it is very good news for defense prime contractors.
Like the already-passed House version appropriations bill, the Senate bill "finds" $15B to fund most of the services' unfunded priority lists for more fighters, more ships and higher readiness levels that were not requested by the President. Unlike the House, the Senate "finds" the money from within the President's request itself rather than by underfunding the OCO budget."
Coupled with the House bill, we can use the Senate Appropriations Committee changes to derive the minimum amount of increase that the major defense primes should see in the FY 2017 Pentagon budget.
Although we are three to six months from a final bill, we can anticipate the following changes to programs of interest to Lockheed. These are essentially a worst case as compromises between the House and the Senate when the bill goes to conference are likely to result in further increases to the Senate bill.
Lockheed Martin (LMT) major defense programs will see at least a net 3.6% increase of +$800M to the PresBud request of $21.8B. The Senate adds +$355M for UH-60 for the National Guard to the PresBud request of $755M. The President's request for $7.7B for F-35s will include four additional jets for the Marines (House added a total of 11 acft) but the program will see a net reduction of -$148M after all haircuts have taken place. There are +$263M in additions to the $146M requested for C130J and Compass Call. LMT's will share a $495M hit to the EELV program with its ULA partner, BA. Missile defense continues to shine with $50M added to the $370M Aegis Ballistic Missile Defense budget and +$50M to the $464M THAAD program. By adding +$475M to build an unrequested third ship in FY17, the Senate joins the House in resisting the Navy's plan to early downselect and truncate the Littoral Combat Ship."
