Survey Shows Forward Outlook for Defense Spending is Mixed - Deutsche Bank (LLL) (GD) (LMT) (HII) (NOC)

The environment for defense spending has improved in the last 6 months, according to a Deutsche Bank survey of 60 program managers. However, outlook is mixed.

"On the 6mo backward look, this year’s survey showed a dramatic shift from the results of the last several years with 46% of respondents seeing improvement in the budgetary situation in the trailing 6mo (vs. <10% in each of our 3 previous surveys). That being said, the forward outlook pessimism has gotten only modestly better with 84% expecting the budget situation to worsen over the next 6mo (vs. 90% in last year’s survey)," said analyst Myles Walton.

"On average, program managers surveyed expect weapons spending to be about $145B in FY19 (modestly below the $152B targeted FY17 in last year’s survey), which is about 25% below the FY15 Pentagon’s uber-optimistic projected level (and 14% below the Pentagon plan with sequestration). Given the level of deterioration in spending from cuts with/without sequestration, we continue to view PM expectations as closer to reality than the DOD published plan. Overall, the estimates imply DOD weapons spending declining at a 2% CAGR from FY14-FY19 (following a 7% CAGR FY08-FY14), which for an average large-cap defense name with non-US exposure of 15-20% lead to a 1-3% CAGR sales decline for the next 3-5 years. We continue to see precipitous declines (such as those implied in the erroneous Green Book data) as unlikely as spontaneous growth (through Russian expansionism is note-worthy)," he added.

Deutsche Bank's picks in the space include General Dynamics Corp. (NYSE: GD), Huntington Ingalls Industries (NYSE: HII), and L-3 Communications (NYSE: LLL). Other stocks mentioned in the report include Boeing Co. (NYSE: BA), Lockheed Martin Corp. (NYSE: LMT), Northrop Grumman Corp. (NYSE: NOC) and Raytheon Co. (NYSE: RTN).

For an analyst ratings summary and ratings history on L-3 Communications click here. For more ratings news on L-3 Communications click here.

Shares of L-3 Communications closed at $115.85 yesterday.

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