Defense stocks have rocketed to multi-year highs in 2017 on expectations of increasing revenue from a growing Pentagon budget. Nine months into the year, and most companies are still waiting.
An aerial view of the Pentagon. Source: Getty Images.
After weathering years of budget battles between Republicans in Congress and the Obama White House that culminated with sequestration -- and a freeze in defense spending -- in 2013, the defense industry was expecting a bounce back following the GOP sweep of the White House and Congress last November. Stocks reacted accordingly, with shares of defense titans Lockheed Martin (NYSE: LMT), General Dynamics (NYSE: GD), Northrop Grumman (NYSE: NOC), and Raytheon (NYSE: RTN) all up between 18% and 31% year to date, and Boeing, with its mix of defense and commercial aerospace, climbing more than 60%.
But for all the enthusiasm, the actual results so far have failed to match expectations. Lockheed Martin, the nation's largest defense contractor, generated third-quarter revenue that fell short of analyst estimates and predicted flat sales to modest growth in three of its four businesses in 2018. Boeing and General Dynamics, meanwhile, reported defense sales down 5% and 1%, respectively, from last year, with Boeing also using "flat" to describe next year. Raytheon's quarter included a beat on earnings per share, but a miss on revenue relative to expectations.
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The lack of revenue growth, in part, can be explained by the complexity of the defense procurement cycle, with long, drawn-out bids and multi-year payoffs from contract wins. This year, politics has also played a part, with the transition at the White House causing the Pentagon to move slower than usual.
General Dynamics CFO Jason Aiken said during a conference call with investors that "the change in administration" was responsible, in part, for slowing execution on some new contract awards. The comments come three months after company CEO Phebe Novakovic complained that delays in the new administration filling vacancies in key positions at the Department of Defense was slowing new contracts and delaying execution on existing programs. "Without the appointments, it is difficult to process contracts and get authorized and appropriated funds obligated to contracts," Novakovic said at the time.
Since Novakovic made those comments, some of those vacancies have been filled. Most notably, Ellen M. Lord was named Under Secretary of Defense for Acquisition, Technology and Logistics in August, and is responsible for weapons purchases and overseeing the Pentagon's acquisition program.