Analyst Notes Bullish DoD Comments (LMT) (GD) (HII) (LLL) (NOC) (RTN)

In a research note, Deutsche Bank analyst Myles Walton pointed out bullish DoD comments from press secretary Rear Adm. Kirby yesterday related to the Overseas Contingency Operations budget, or OCO.

Related stocks include Lockheed Martin (NYSE: LMT), General Dynamics (NYSE: GD), Huntington Ingalls Industries (NYSE: HII), L-3 Communications (NYSE: LLL), Northrop Grumman (NYSE: NOC), and Raytheon (NYSE: RTN).

"The OCO budget has been used to fund the war efforts in a material way since 2001 and as sequestration rolled in and the war efforts wound down, the OCO budget was also an important relief valve to DoD budgetary pressures as OCO spending is outside of the scope of the sequestration legislation," said Walton.

"By way of context, the FY15 OCO budget included about $65B, which was down from the $81B in FY14 and $87B FY13 and down further from the $115B in FY12, the $158B in FY11 and the $167B in FY10. The general consensus would be for the OCO budgets to fall from the $65B level given the further wind down in Afghanistan expected (i.e. the Administration placeholder for FY16 had been $30B)," continued the analyst. "However, in response to a question of the FY16 budget for OCO, the press secretary said 'just because it went down over the last two years…I don’t think it’s logical to assume, and I wouldn’t want to get ahead of any process, that it’s going to be even smaller still…by some degree'."

"While not shocking, this to us is a bullish indicator that the DoD will continue to have access to the OCO to absorb pressures in the DoD base budget, which remains restrained from growth without legislative relief from sequestration," he added.

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