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The Ultimate Guide to Investing in Defense

01.03.2019 | Ben Phillips, CFA


defense stocks investment playbook

The EventShares Policy Playbook series is a group of concise, client-friendly research reports highlighting key policy investment themes. Each Playbook covers background of the policy, U.S. industries and companies impacted, and the emerging opportunity. 


The Defense Appropriations Playbook provides an in-depth overview of the policy, the size of the market opportunity, the investment case and timing. Download the full PDF to read the entire report.

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Policy Overview: What's Happening?


The Trump administration continues to push for increased defense budgets in both the U.S. and foreign countries. Defense Secretary James Mattis and Republican defense hawks support increased defense spending, pointing to years of underfunding that has decreased military readiness, slowed modernization initiatives, and allowed foreign adversaries (e.g. China) to catch up. In addition, geopolitics surrounding China, Russia, North Korea, and the Middle East are prompting the U.S. to re-evaluate the need for potential military intervention.



The Numbers: Size of the Opportunity


  • 82% | 85% - Percentage of House & Senate, respectively, voting to approve FY19 $716 billion defense authorization bill
  • $750 billion - The Trump administration's recent projected FY20 defense budget, after initially projecting $700 billion
  • $576 billion - FY20 defense spending cap under the Budget Control Act of 2011, unless Congress raises the cap 



Our Take: The Investment Case


Congress passed the Budget Control Act of 2011 (BCA) to solve the 2011 debt ceiling crisis. The BCA increased the debt ceiling by $400 billion in exchange for imposing spending caps, which unless subsequently raised, put in place a ceiling for both defense and non-defense spending. The result was lower defense spending and fewer contract opportunities starting in FY12 and proceeding through FY17.

The Trump administration has reversed the trend of lower defense spending seen during the Obama administration
and pushed foreign governments to increase defense spending, both of which may generate additional sales for the U.S. defense industry. The Trump administration is backed by James Mattis and congressional defense hawks, who are anxious to make up for lost defense investment during the early BCA years. The priorities include modernizing the naval fleet, maintaining and building out the military's aircraft fleet, and deploying a more technologically advanced soldier.

In our view, the impact of higher defense budgets can be traced directly to companies operating in the defense industry.
Increased spending means more contract opportunities for defense prime contractors, their suppliers, and the outsourced consulting firms that contract with the Department of Defense (DoD).



Timing: Significant Actions Taken & Next Steps


During the first half of 2018, Congress passed the Bipartisan Budget Act of 2018, which increased defense caps under the BCA for FY18 and FY19. However, the legislation did nothing to change the spending caps for FY20 or FY21. This has increased defense budget uncertainty for FY20 and beyond. In the fall of 2018, the Trump administration walked back defense budget expectations and Mick Mulvaney directed the DoD to budget for $700 billion. Then in December 2019, President Trump switched positions and announced a $750 billion defense budget. We have two unanswered questions: (1) How does the Democrats taking control of the House impact the probability of raising defense spending caps under the BCA? (2) Will Washington, D.C. continue to increase spending and ignore BCA caps, or will fiscal restraint take hold? We expect the first half of 2019 to provide answers to these questions.


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