Trump Gives New Volatility to Defense Stocks in 140 Charactersby and
Contractors decline as president-elect takes on F-35 costs
Lockheed’s program is latest target after Boeing, Ford
Investors who rushed to snap up defense company stocks in the belief Donald Trump would bolster military spending may be in for a roller coaster ride.
With 140-character broadsides aimed at Lockheed Martin Corp.’s F-35 fighter and Boeing Co.’s Air Force One makeover, the president-elect has introduced new volatility to the normally staid sector. While drugmakers and Ford Motor Co. have also felt his wrath, the outburst against the world’s largest defense company and “out of control” costs for its marquee program underscored the new risk looming in a bull market for weapons-makers.
“The president-elect seems ready to attack any industry that displeases him,” said Loren Thompson, an analyst with the Lexington Institute. “Military contractors who think they can count on a program plan have to wonder what all this impulsive behavior by the president-elect portends for the future.”
Military budgets from Europe to Southeast Asia are rising as nations bolster their defenses to counter the growing influence of Russia and China. While U.S. defense spending is poised to grow under Trump, margins for contractors are hovering near 60-year highs, leaving them susceptible to “simplistic criticisms on the overall levels of cost,” Carter Copeland, an analyst at Barclays Plc, wrote in a note to clients Tuesday.
Lockheed fell 0.7 percent to $251.30 at 12:52 p.m. in New York, adding to Monday’s drop of 2.5 percent. Northrop Grumman Corp. slid 0.4 percent to $231.14 while Raytheon Co. dropped 0.8 percent to $142.70. Declines during the last week have erased much of a post-election rally, when investors bet the companies would win out from Trump’s goal of boosting the “depleted” military.
“Whether there is any real policy reform of significance on the horizon is up for debate,” Copeland said. “But for now that seems to be less important to short-term trading, which is seizing on the industry’s vulnerability to criticism on costs/profits.”
Trump has gone after major U.S. companies over the past month, assailing Boeing last week over the development budget for Air Force One and badgering United Technologies Corp. for a plan to move some U.S. jobs to Mexico in its Carrier air-conditioning unit.
As during the campaign, the Twitter blasts soften up would-be adversaries, set Trump’s agenda and divert attention from other issues, including a Central Intelligence Agency report suggesting that Russia meddled in the November election to Trump’s benefit, Thompson said.
Attacking defense companies is a natural follow-on to Trump’s anti-Washington rhetoric on the stump. Jason Gursky, a defense analyst at Citigroup Inc., has even handicapped the Twitter exposure and stock ramifications for programs ranging from General Dynamics Corp.’s Littoral Combat Ship contracts to Textron Inc.’s V-22 Osprey.
“Realistically, any big program is at risk because almost any big defense program is over-cost or was under-performing at some point,” Gursky said in a report Tuesday.
Trump spooked the markets Monday without even mentioning Lockheed by name, tweeting only that the F-35 program’s costs are out of control. “Billions of dollars can and will be saved on military (and other) purchases after January 20th,” he said, referring to inauguration day.
The tweet took aim at the Pentagon’s most expensive weapons system and the world’s biggest defense contractor, days after the president-elect posted a link to a Washington Post article about a Pentagon report on $125 billion in administrative waste. The $379 billion Joint Strike Fighter is the first jet created to serve the vastly different combat missions of the Air Force, Navy and Marines. Like many complicated military programs, the jet has been plagued by delays and bugs in its cutting-edge technology.
The F-35’s costs have already fallen by 60 percent, according to Lockheed Martin, and by decade’s end the company expects to manufacture the aircraft for about $85 million each. “We understand the importance of affordability, and that’s what the F-35 has been about,” said Jeff Babione, executive vice president and general manager of the F-35 program.
Questioning the costs for defense contracts is a valid exercise, said Jefferies analyst Howard Rubel, despite the nuances or understanding of dynamics that may be lost in Trump’s Twitter posts.
“Outside looking in, everything seems expensive for defense, but these particular systems challenge the laws of physics, and they’re built in small quantities,” Rubel said. “The demand curve for military products is not driven by normal economics.”
With the rising military budget under Trump comes a growing likelihood of acquisition reforms that could clip profits for defense primes like Lockheed and Boeing. “At least for now, it’s being realized in the realm of investor perception much faster than many assumed possible,” Copeland said.