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President Biden’s proposed defense budget for the next fiscal year is likely to benefit technology suppliers amid spending constrains imposed by Congress, according to defense-industry analysts at several financial-services firms.
Within the request for a 1% increase to about $850 billion, the Pentagon foresees personnel and maintenance costs “squeezing out modernization spending,” Matthew Akers, analyst at Wells Fargo, said in a March 11 report.
The military budget is a significant indicator of performance for multiple aerospace and defense stocks. The Biden administration’s request, which faces months of negotiations with lawmakers, is consistent with the funding levels Congress approved in the Fiscal Responsibility Act of 2023 that capped federal spending.
The proposed budget is largely a symbolic document whose spending levels are subject to change, if recent history is any guide, through what are known as continuing resolutions to avoid a government shutdown.
“While the Department of Defense’s hands are tied on what they were able to request, ultimately the true spending total will be known later with incremental funding from Congress,” Ronald Epstein, analyst at Bank of America, said in a March 12 report.
Prioritizing Personnel, Maintenance
The Pentagon in briefings this week said increased spending on personnel and maintenance is necessary to retain soldiers while remaining ready for conflicts. By deferring spending on research and future weapons systems, it has more time to plan and set priorities for those programs.
“The FRA, poor recruiting numbers and a higher-than-expected operational tempo are all consuming budget resources,” Jason Gursky, analyst at Citigroup, said in a March 12 report. “This is putting downward pressure on the outlook for the weapons accounts in the near term given the more flexible nature of that spending.”
He said the proposed budget doesn’t change the investment thesis for aerospace and defense stocks covered by Citigroup’s research.
Tech ‘Winners’
Meanwhile, analysts at financial-services firm Wells Fargo pointed out how the proposed budget would affect a broad swath of government contractors.
Information-technology services companies such as Booz Allen Hamilton Holding (NYSE:BAH), CACI International (NYSE:CACI), Leidos (NYSE:LDOS) and Science Applications International (NASDAQ:SAIC) are poised to benefit from the proposed 2% gain in funding for operations and maintenance, according to Wells Fargo.
Bank of America’s analysts concurred that technology-related companies have emerged unscathed from the Pentagon’s targeted reductions. Providers of Command, Control, Communications, Computers and Intelligence – or C4I in military parlance – can be seen as “winners.”
“C4I saw the largest budget request increase, up approximately 46% to $21.1 billion from the prior budget,” according to BofA. “We view the increase as a major positive, as it demonstrated to us, despite constraints, that tech development remains a priority to enhance U.S. military capabilities.”
Wells Fargo pointed out how other defense contractors would fare in the proposed budget.
General Dynamics (NYSE:GD), which has an information technology unit, also would benefit from higher spending on the Columbia-class nuclear-powered ballistic missile submarine and Arleigh Burke-class destroyer for the U.S. Navy. Lower spending on the Virginia-class sub would partly offset these gains, “although we think Virginia funds could potentially be added back by Congress later,” according to Wells Fargo.
Lockheed Martin (NYSE:LMT), the biggest U.S. defense contractor by revenue, would benefit from higher spending on Overhead Persistent Infrared satellites, Trident submarine-launched nuclear missiles and the C-130 Hercules military transport plane. However, funding for the Joint Air-to-Surface Standoff Missile, Aegis Combat System, Long Range Anti-Ship Missile and Apache attack helicopter would be lower.
RTX (NYSE:RTX), formerly named Raytheon Technologies, also would be “challenged” with cuts to Aegis, the SM-6 missile and AIM-120 Advanced Medium-Range Air-to-Air Missile, according to Wells Fargo.
The Pentagon cut its spending plan by 9% for the F-35 fighter jet, whose prime contractors are Lockheed (LMT) and RTX (RTX). However, that spending is likely to be restored in future years after a technology upgrade is completed, according to Wells Fargo.
Funding for some of Northrop Grumman’s (NYSE:NOC) programs “looks disappointing,” with flat spending for the B-21 Raider stealth bomber and cuts to the Sentinel ground-based intercontinental ballistic missile, according to Wells Fargo.
Boeing (NYSE:BA) would see cuts to the F-15 fighter jet, Apache helicopter, Ground-Based Midcourse Defense missile system and E-7A radar plane, according to Wells Fargo.
