How Silicon Valley and a New Pentagon Strategy Are Breaching the Defense Business

- Advertisement -

Military stocks are underperforming amid new competition from outside the industry and changes in spending, purchases

- Advertisement -

Contrary to expectations, however, the political deal has not rekindled investor optimism. After losing ground during the pandemic, military stocks are now at their cheapest valuations in eight years.

- Advertisement -

Some analysts blame sustainable-investment trends, but the bull market has been ruthless to all equities untouched by economic cycles, which have made little gains from the pandemic’s reopening. High inflation realistically shrinks budgets and can reduce margins on larger programs such as the F-35 fighter, which makes up 30% of Lockheed Martin‘s

Revenue, even though history shows that increased costs are ultimately passed on to customers. Wall Street optimism also took a beating when Lockheed, Northrop Grumman and L3Harris recently provided a disappointing outlook.

- Advertisement -

Yet investors are also concerned about a deeper problem: Defense companies have become too stuck to their traditional role as stable dividend payers when they need to accelerate investments in technology.

The past 20 years have been about counter-terrorism and counter-terrorism, leveraging ground vehicles, aircraft, drones and missiles. “There’s a shift now toward a different adversary: ​​peer-to-peer state actors,” says Alex Kreutz, consultant at Patriot Industrial Partners. These include China and Russia, which have been fueling geopolitical tensions in Taiwan and Ukraine, respectively, and have invested in long-range weapons such as hypersonic missiles, antisatellite technology and cyber security, where the US sometimes lags behind.

The Pentagon has spent years inciting Congress to push for innovation over the purchase of equipment such as the F-35 or Abrams tank built by General Dynamics.,

In addition, competition with other large nations has led to a change in procurement strategy under reformers such as former Air Force takeover Caesar Will Roper: prototyping and advanced software are increasingly being used to accelerate the development phase. being separated from production.

For older contractors, development involves low-margin cost-plus contracts; They make big bucks when they mass-produce new technology. The emerging divide between development and production could further this established model with competitive bidding in both phases. The 2019 megamerger of Raytheon and United Technologies was an early sign of pressure from military suppliers that experience more aggressive bidding and more aggressive bidding on larger contracts.

On smaller projects, competition is coming even outside traditional industry ranks: Carmaker General Motors,

Which re-entered the defense industry in 2017, recently won a $214 million contract from the US military and is looking to capitalize on incoming military demand for electric vehicles. For new focus on drones and artificial intelligence and software, Silicon Valley rises like Palantiro,

Anduril and Shield AI can gain the upper hand. Technology giant,

Google, Microsoft and Oracle have fought over cloud-computing contracts.

“I characterize this as small nibbles so far,” said Byron Callen, defense-industry analyst at Capital Alpha Partners. “Legacy companies haven’t really been able to convince investors that they will participate in some of these high-growth areas.”

To be sure, large firms are also exposed to areas of growth. a quarter of northrop‘s

Revenue comes from space, Bernstein Research data shows—though competition from outside SpaceX, Blue Origin and Rocket Labs is big there as well. Also, this year’s defense bill showed once again that lawmakers reimagine ships, planes and tanks that the Pentagon doesn’t want, as cuts in purchases in those areas impact jobs.

Overall, however, legacy defense contractors may pose an image problem among investors — one that has nothing to do with the deadly nature of their business.

Write John Sindreu [email protected] . Feather


- Advertisement -

Stay on top - Get the daily news in your inbox

DMCA / Correction Notice

Recent Articles

Related Stories

Stay on top - Get the daily news in your inbox