The budget drama in DC is currently focused on budget authority for FY 2018 or the lack thereof which resulted in the shutdown of the government this weekend. From an investor point of view, government outlays, i.e., expenditures or disbursements, are far more significant than budget authority when forecasting/interpreting near term defense company earnings.
US Defense Department outlays for investment (Procurement + RDT&E) for Q1 of USG FY 2018 (CY17 Q4) hit $48B, + 11.4% compared to the same period a year ago and + 6.4% sequentially over Q4 of FY 2017 which itself had shown strong growth.
The 6.4% increase in FY18 Q1 outlays compared to the preceding quarter is particularly impressive in view of the normal "lumpiness" of DoD investment outlays given the incapability of Congress to ever fund the government on time (1 Oct). This has resulted in routine and ever longer duration Continuing Resolutions during which new starts are prohibited (four CRs this year alone). As a matter of practice, acquisition managers don't even schedule significant new contracts in Q1 because of the uncertainty of funding and that trend is only increasing.
Expenditures to defense companies will continue to accelerate. The FY18 Q1 outlay report reflects the expenditure of appropriations from FY16 and FY17. Outlay reports do not yet reflect the bipartisan intent to increase DoD investment appropriations by 16% in FY18 compared to the final FY17 total. DoD investment outlays have begun the climb back to historical peaks.
We believe investment outlays will exceed DoD's forecast of $186B in FY18 and will approach $210B (Reagan era levels) in FY19 and 20. Of course, all of this assumes that Congress will raise the FY18/19 budget caps and actually pass an appropriations bill. We expect that to happen in February.
