Defense industry flourishing under Donald Trump

Despite Donald Trump’s posturing, the U.S. defence industry under Donald Trump is set to reach new heights.

Shares of American defence companies have largely shrugged off President Donald Trump’s criticism over high costs, which incidentally are set to reach new heights under him.

Having assumed office, Trump has made it amply clear that he plans on expanding the U.S. military which has given analysts and investors confidence that the U.S. defence industry will grow instead of contract, as feared earlier.

“There’s a multi-year upturn in play here. If you believe we’re in the first inning of a multi-year up cycle, the valuations can stay extended for a longer period of time,” said Peter Arment, an aerospace and defence analyst at Robert W. Baird & Co.

In his 2017 defence industry outlook, Ronald Epstein an analyst at Bank of America-Merrill stated that up cycle for the industry in fact started before the elections. With Congress in Republican control, this trend is only likely to grow stronger with the defence industry likely to see more robust growth than previously expected.

Shares of defence companies did shoot up after the results of the November 8 elections were announced, however they have faced volatility due to Trump’s tweets which have attacked defence contractors on the issue of costs.

On December 6, Trump had targeted Boeing Co with tweets that read that its costs for the new Air Force One planes were “out of control” and that the order should be cancelled.

On December 12 Trump had come down hard on Lockheed Martin Corp’s F-35 fighter jet program as being way too expensive. Later on Monday, Trump said, he and Lockheed Martin had trimmed off $600 million from the latest contract to buy 90 F-35 fighters for the U.S. Airforce.

Despite the slashing off costs, Lockheed Martin’s shares remained unchanged on Monday’s with analysts saying the market had already factored in the planned reduction of the F-35 fighter aircrafts.

Lockheed Martin is the Pentagon’s number one weapons supplier.

“We do not think this is anything new, or material,” wrote Jim Corridore, airlines and logistics analyst for CFRA Research, in a note to clients.

He went on to add, “Overall, we think the F-35 is likely to be a strong driver of EPS for LMT.”

Lockheed Martin’s shares are up by 5.1% since the election. Similarly, Boeing’s shares have risen by nearly 15% percent since the election.

Lockheed’s F-35 program is critical to its yearly performance: the fourth quarter results of the company showed an increase of nearly $2 billion which can be attributed to increased sales of its fighter jets.

Investors have a high interest in the company.

However the same cannot be said for companies across this industry. Investor interest in some defence companies were less bullish than expected.

“The stocks got ahead of themselves,” and there’s still uncertainty ahead for the defence industry, said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

However, Trump’s plan to build a wall on the border with Mexico is likely to benefit defence contractors who make border security systems such as remote video surveillance towers.


Categories: Economy & Finance, Entrepreneurship, HR & Organization, Strategy

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