Zacks Investment Research: Current Aerospace and Defense Outlook

August 12, 2010 at 10:48 am 1 comment

OVERVIEW
The growth of the Aerospace and Defense industry depends largely on the spending outlook of defense departments, with the U.S. defense budget as the primary driver. The U.S is world’s largest aerospace and defense market, home to the world’s largest military budget, which for fiscal 2011 stands at $706 billion.
In the last few years, elevated U.S. defense outlays reflected stepped up military operations related to the wars in Afghanistan and Iraq and the overall War on Terror. Such defense spending is the major source of revenue for the top nine global aerospace companies, of which six are based in the U.S.
The commercial aerospace market, which plummeted during the economic recession, is expected to revive in the coming years, fueled by the gradual recovery of the global economy.
OPPORTUNITIES
Lockheed Martin Corporation (LMT – Analyst Report) is the biggest recipient of U.S. defense contracts followed by The Boeing Company (BA – Analyst Report) and Northrop Grumman Corp. (NOC – Analyst Report). With the wars in Iraq and Afghanistan expected to wind down in the coming years, core defense spending is also expected to follow that trend. In response to this situation, the big operators will most likely target mergers and acquisitions (M&A) to bolster their operating prospects.
At the macro level, a gradual shift in defense spending patterns can be discerned. In response to the asymmetric terrorist threats, the emphasis appears to have shifted to high-tech intelligence equipment, replacing demand for conventional big guns and heavy armor. Major industry players have, in response, resorted to bolt-on acquisitions to plug holes in their product offerings.
Boeing has been particularly active on this front, having acquired Argon ST, a premier developer of intelligence equipment. Boeing also acquired Narus, a provider of real-time network traffic and analytics software used to protect against cyber attacks and persistent threats aimed at large Internet Protocol networks.
These defense operators are also entering into strategic alliances and partnerships with competitors to improve their prospects to land major contracts. Recently, Boeing and Northrop Grumman announced a strategic partnership to pursue the competitive development and sustainment contract for future work on the Ground-based Midcourse Defense (GMD) system for the U.S. Missile Defense Agency (MDA).
The long-delayed $35 billion contract from the U.S Air Force for aerial tankers remains a major hope for the defense industry. Boeing and Airbus are two major competitors for the contract and a decision from the department is expected later this year.
Outside of defense, the return of demand in commercial airlines remains a major positive for the industry, with Boeing increasing production of 737 twice to meet the expected higher demand around 2012. Boeing has secured a big order from Air China for jetliners.
The International Air Transport Association recently forecast that the global industry would make a profit of $2.5 billion this year, after a huge loss of $9.4 billion in 2009, a marked improvement from its predictions late last year of more losses this year.
The earnings reports posted by the U.S Airliners for the second quarter reflect the strongest results in the last three years, the main operators Delta, United and US Airways combined to post profits of $1 billion, after incurring huge losses during the recession.
The recent Farnborough air show has helped the aviation industry as the manufacturers have started to receive new orders from customers. New orders had almost dried up during the recession.
WEAKNESS
The global economic downturn that started in late 2008 has significantly weakened the financial profiles of all major industrialized countries. While the industry has historically been very successful in the ‘guns vs. butter’ debate, particularly in the all-important U.S. market, it remains to be seen how it will fare in changed backdrop characterized growing calls for increased domestic spending needs.
The US defense department is planning to reduce the defense budget by $100 billion over the next five years. These cutbacks will impact the big contractors as the lion’s share of their revenues comes from defense spending.
In Europe, United Kingdom is planning to slash its defense budget by 20%. Moreover, Italy has decided to lower defense expenditure. There is also pressure on France, Germany and Spain to review and trim their defense budgets.
PROSPECTS
To face the possible threats of spending cuts, defense players might explore the option of leasing out their heavy weapon systems rather than selling it to the defense department, leading to win-win deal for both the government and defense operators.
The growing international markets in the Middle East, China, India and South America provide an opportunity for defense operators to increase their revenues. Defense expenditure is increasing gradually in India. The country is planning to spend $80 billion on defense in the next five years for acquisitions of new equipment.
The improvement in the economy is gradually feeding the commercial aerospace market. The passenger as well as cargo traffic is expected to increase mid-single-digits on an annual basis from now through 2029 in a recent report published by Boeing. The reports suggested that the total demand for jets is expected to be 30,900 between 2010 and 2029 amounting to $3.6 trillion.
Source: Zack’s Review on Investments
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Entry filed under: Aerospace, Boeing. Tags: , , .

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1 Comment Add your own

  • 1. All Around The World News  |  August 18, 2010 at 7:04 am

    Lockheed said to offer warranty for missile interceptor…

    We cover the same subject but your aproach is intersting….

    Reply

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