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The Spade Defense Index
Interview – June 29, 2006
HDS: Hi this is Ann Marie Fleming with
HomelandDefenseStocks.com.
HDS: In today’s discussion with Scott Sacknoff, manager of the SPADE®
Defense Index, ticker symbol, DXS, we will be taking a look at the
Department of Homeland Security, learn who were the top contractors and
discuss the market for major border security initiatives worth an estimated
$10 billion. We will also get insight into the supplemental funding by
Congress and discuss the recent broad stock market decline to learn how
defense and homeland security companies fared.
HDS: Mr. Sacknoff, good afternoon.
SMS: Good afternoon, Ann Marie.
HDS: So who did the most business with DHS last year?
SMS:
- As you can probably guess, since FEMA, the Federal Emergency Management
Agency is part of DHS, hurricane relief efforts dominated the list with 5 of
the top 10 companies being FEMA contractors, getting $3.6 billion or 26% of
DHS’ total contract awards. Using statistics provided by Eagle Eye
Publishers, contracts from the Coast Guard were second at $2.1B or 21%, TSA
third with $1.6B or 16%, and Customs 4th at $1 billion or 10%.
- What investors looking for a play in homeland security should note is the
prevalence of defense companies in the top 20 – General Dynamics was the 6th
largest supplier, L-3 ninth, Lockheed Martin 11th, Northrop Grumman 12th,
Boeing 15th, and URS 17th. Top contactors at the individual agencies include
Computer Sciences, Honeywell, and Mantech. All I should mention are
constituents of the SPADE Defense Index.
HDS: And it’s these defense firms that are bidding for a lead role in
the Secure Border Initiative Network. Can you tell us about this program?
SMS: On May 30, 2006, five teams issued proposals to develop the $2
billion SBIN, a project designed to use the latest surveillance and
networking technologies to continuously monitor and safeguard the U.S.
borders with Mexico and Canada.
It is a high-profile program expected to be awarded in September. Based on
the heated debates in Congress regarding border security and immigration,
this program is on the fast track and will get a lot of visibility as well
as put pressure on the winning team to deliver on time and on budget.
HDS: So who are the five teams?
SMS: Boeing, Lockheed Martin, Northrop Grumman, Raytheon, and
Ericcson are leading the teams. Various divisions of L-3 are partners in at
least three of the bids (Boeing, Ericcson, Northrop Grumman). Northrop
Grumman partners including Anteon, SRA and General Dynamics. Ericcson’s
partners include Computer Sciences and MTC Technologies.
HDS: What about internationally? Any similar projects?
SMS: There are lots of similar projects around the world. One of the
biggest comes from Saudi Arabia, which has requested bids for an $8 billion
border surveillance system referred to as MIKSA (the name of the agency that
is seeking the bids). After a deal with France fell through, the project was
opened to other countries-teams. To show its size, according to industry
sources, one proposal on the table called for a 12-year project involving
225 radars, a secure command control communications and information system,
20 helicopters and surveillance aircraft. Eight nations were invited to bid:
the UK, France, Germany, Italy, Spain, Russia, China, and the U.S. (which is
led by Raytheon).
HDS: The news often refers to supplemental funding by Congress. For
those unfamiliar, can you tell us what this is and what type of items can be
found in it?
SMS: Supplemental funding is simply a bill by Congress that
authorized spending outside of the normal budget review process. The $65.8
billion emergency funding bill includes $38 billion to support military
operations and maintenance in Iraq & Afghanistan and $15 billion for
procurement. O&M covers costs from ammunition and fuel to fixing damaged
equipment. It includes $2 billion to develop countermeasures for roadside
bombs and $538.5 million to buy body armor and protective gear. There’s $890
million for armored Humvees, $227 million for C17 aircraft parts, and $499
million for Army trucks.
HDS: That’s obviously a lot of money going to a lot of different
things. So how has all this recently played on Wall Street?
SMS: As I’m sure your readers who invest have noticed, the mid-May
and mid-June saw a market decline of nearly 10% with some investment sectors
dropping as much as 20% or more. The defense and homeland security sector
was not immune and the SPADE Defense Index dropped 11% in this period,
although even at its low, it remained up for the year. Year-to-date, the
SPADE is still up relative to the S&P 500.
HDS: Which types of firms were the leaders and which the laggards?
SMS: The large defense companies that are involved with industrial
manufacturing have done the best year-to-date and held onto much of their
gains during the recent downturn. Information technology firms had mixed
results, neither gaining nor declining much during the year or the previous
month. The performance by the small and mid-cap homeland security firms
represented in the SPADE were relatively weak as investor appeared to take
profits in some companies that had risen over the past several months. One
would expect increased volatility in smaller companies as compared to the
larger capitalized firms and this might be an example.
HDS: Any suggestions for those investors worried about this
volatility?
SMS: If the risk associated with an individual company is a worry but
they want exposure to the market, then the investor should consider products
that offer diversified exposure to a number of companies in the sector. One
such example is the Powershares Aerospace & Defense Portfolio ETF of which
the SPADE is the underlying Index. The ticker for this fund is PPA and it
gives investors in it, shares in more than 50 companies operating in defense
and homeland security. Before investing in any product, investors should
review the prospectus as not every investment is appropriate for every
investor.
HDS: Very interesting. Well thank you for taking the time today. We
look forward to more insight the next time we chat.
SMS: You’re most welcome. For your clients interested in getting more
information on the SPADE Defense Index, please visit
http://www.spadeindex.com. Investors should note that the exchange traded fund trades under the
symbol ‘PPA’ and historical data on the SPADE Defense Index can be found
using the index symbol ‘DXS’.
Disclaimers: The information presented in this interview
is for informational purposes and should not represent a solicitation or an
offer to purchase an investment product. SPADE and the SPADE Defense Index
are registered trademarks of the ISBC. Powershares is a registered trademark
of Powershares Capital Management.
For More Information:
Dawn L. Van Zant - President
800.665.0411 –
dvanzant@investorideas.com
Ann-Marie Fleming – Corporate Development
866.725.2554 –
afleming@investorideas.com
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