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Aerospace and defense sector outlook robust
Defense Market Report
Exclusively for InvestorIdeas.com
By James Smith
January 12, 2007
Equity analysts and rating agencies predict a strong performance in the aerospace and defense sectors on the back of ongoing US military activity in the Middle East and elsewhere as well as recovery in the global airline industry. Both sectors are expected to result in solid near-term gains in earnings per share.
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Rating agency Standard & Poor’s (S&P) said that its fundamental outlook for aerospace and defense is “positive,” citing the need for the US government to fund activities to counter future threats from North Korea and Islamic terrorists in addition to the continuing Middle East conflict. “At the same time, we believe that defense contractors have become more efficient and note strong cashflow generation, significant share repurchases, and debt reductions at a number of contractors,” S&P added.
Enthusiasm among market players has been precipitated by a number of events that are expected to benefit small-cap and large-cap investors.
The Pentagon is expected to seek a additional USD100 billion to USD130 billion as an emergency supplement to the 2007 budget, in addition to the USD70 billion Congress approved as a bridge fund in 2006.
This would put 2007 defense spending at over USD660 billion.
In addition to new equipment, the US government is expected to spend a substantial amount on refurbishment of existing equipment, including Bradley Fighting Vehicles, Humvees, and other equipment from helicopters to tanks. Key military contractors as well as sub-contractors are poised to benefit from soaring government spending as the military repairs or upgrades combat equipment used in Iraq and Afghanistan.
The homeland defense sector also promises opportunities for small-cap companies.
While Boeing beat out four other bidders in September 2006 for the Secure Border Initiative contract (SBINet) that could be worth some USD2.5 billion over the long-haul, that prime defense contractor is looking to start-ups and small specialised companies to help install a network of nearly 2,000 towers along the northern and southern borders of the US in coming years. The towers will employ cameras, sensors and other instruments in a networked grid to detect and track people coming across the border.
Companies, such as Boeing, Northrop Grumman and the US National Security Agency, active in the sector are using so-called homeland security incubators such as the Chesapeake Innovation Center to act as a conduit themselves and federal labs, venture capital firms and start-up companies focused on defense technology. The process will make it easier for small-cap defense companies without the financial muscle of their larger counterparts to tie into large projects otherwise unavailable to them.
Small companies and start-ups pay nothing to work with incubators; the large contractors pay a fee to list their requirements and the incubators attempt to match up needs with available expertise.
Lest we forget new entrants to the public market, the defense industry is preparing for its first initial public offering (IPO) of the year. Monrovia, California-based AeroVironment Inc, which supplies unmanned aircraft systems to the US Department of Defense, said it is planning a 6.7 million share IPO, with an estimated price range of USD14 to USD16 per share.
The offering is to include 4.5 million new shares and selling stockholders will offer another 2.2 million shares, according to an amended offering document filed with the US Securities and Exchange Commission.
Underwriters, led by Goldman Sachs., will have a greenshoe option to buy another one million shares to cover over-allotments.
This has all the potential to be a very interesting year.
Disclaimer
James Smith is an independent columnist for this web site. James Smith may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment.
InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article. James Smith is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.
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