investingfromtheright

I am retired and take educated guesses on all things financial.

December 17, 2006

December 18, 2006: Military trends and Stocks that may benefit

The following is derived from a recent conference and other sources that place emphasis on what military programs are going forward (or on hold) and the prognosis for our defense efforts. You may benefit by considering likely stock winners for vital national defense programs. Companies providing these systems are in parenthesis next to the items to be purchased.

The latest Emergency Supplement for the War on Terror is going to be almost 100b. That is on top of the 70b funded earlier this year.

The Army will fare best in obtaining funds to bolster their branch of the service, getting almost 50% of the Emergency Supplement. Heavy trucks (OSK),medium trucks (AH),light trucks (AH, TXT) and radios (ITT, HRS). Additionally there is 3.8 b for tracked combat vehicles (GD, BAE Systems).

The Air Force may be the weak sister for the upcoming year. The USAF average aircraft age is 24 years.."We are in uncharted territory". Congress refuses to retire legacy aircraft.USAF has five priorities which may be partially funded through two large rounds of personnel reductions in 2007 and 2008. Priorities are
the KC-X (BA), CSAR-X (BA), a spacecraft program of missile warning and SATCOM (no company on board yet), F-35 Conventional Take-Off and landing (LMT/NOC/BAE) and the next generation Long Range Strike Bomber (NOC,BA,LMT).There is strong USAF consensus that the Multi-Platform-Radar-Technology-Insertion-Program or MP-RTIP is purchased through (NOC/RTN) and integrated on the Global Hawk drone platform (NOC).

Note that in addition to a reduction of personnel, the USAF is deliberately looking to divest low-priority, poor performing types of acquisitions programs. However, Congressional districts maintaining these albatross programs will object. The result may be a weaker, not stronger Air Force to counter threats from China and rogue states.

USAF Space Weapons:

The Space weapons program has reinvented itself due to an over-optimistic performance and introduction schedule, atrophy of systems such as the ICBM and tactical space force during the Clinton-era "peace dividend", poor cost estimating and budgeting and delegation of Total Systems Performance Reliability Responsibility , or TSPR, to contractors without rigorous USAF program oversight.

Thus, a back to basics program of acquisition strategy has commenced to insure clearly defined improvements for each space vehicle, increasing cost estimate confidence to 80% probability from the current 50% and clear segregation of new subsystems in Technology Development Phase from the Production Phase.

Key priorities are the Global Positioning System III (BA or LMT),
Transformational Satellite Program , or TSAT (BA). ..this is a big order, Wideband Global Satcom (BA), Alternative Infrared Remote Surveillance System (RTN, GD and NOC are competing for this)....another big order. and space radar (LMT/NOC).

Other programs are classified and deal with global threats by upcoming Chinese technology in cyber and space warfare and global terror acquisition of WMDs.

Army:

The cost of outfitting one soldier will increase from 11g to 17g.Body armor (AH), protective padding (AH), thermal weapon sight, M4 carbine and night vision devices (ITT).

The Army has a 56b shortfall in equipment as of 10/2006. Companies getting an abundance of orders to quickly produce equipment include (GD, BA, BAE, UTX,ATK, AH/AM General and TXT).These companies will also be upgrading almost all Army equipment, including Black Hawk helicopters, light tactical vehicles, Bradley,Apache helicopters, tracked combat vehicles (W and CTV). Abrams tank (GD), CH-47F (BA).

A plethora of orders going will benefit the following stocks : BA, OSK, AH,TXT, ITT, GD TBD and LMT. I have additional information.E-mail me.

The Navy priorities are the F/A-18E/F Super Hornet and the EA-18G Growler (BA/NOC,
42 Super Hornets and 90 Growlers --minimum., the E-2D Advance Hawkeye (NOH or AHE). The F-35 is being built but orders are pushed back due to budget constraints.

Overall with contracts, the Navy winners in appear to be NOC, GD, BA and EFV.

Notes:

Boeing seems to be handling civilian and military orders extremely well. That bodes well for their subcontractors such as GR.

LLL announced a 500m share buyback.
NOC announced a 1b share buyback.
SAI beat the street's estimate of 0.23 by .05 (0.28).. I recommended this new issue several weeks ago. It is still a strong buy in my view.

In a selective and unusual market during 2007 in large part because of political and world terror instability, I am placing bets on several of the above companies. Please exercise diligence as you research stocks mentioned above for portfolio inclusion. I do not view these as speculative stocks at this juncture.I think that you may wish to hold a couple in your core holdings.

Previous aero defense stock picks in this blog are still valid.

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