Raytheon and Lockheed Martin are two of of the biggest winners in the fight against the Islamic State as defense spending rises, but next year could still see budget pressure on some costly programs.
The Air Force has dropped over 20,000 missiles and bombs in its fight against ISIS, depleting stockpiles below what some see as optimal. The U.S. is also approving munitions sales to Middle East allies.
In November, the State Department OK’d the sale of 13,000 Boeing (NYSE:BA) and Raytheon (NYSE:RTN) bombs to Saudi Arabia for $1.29 billion. Qatar and Saudi Arabia also got approval to buy more Patriot air-defense systems and Patriot missiles from Raytheon and Lockheed (NYSE:LMT).
Meanwhile, the federal government’s fiscal 2016 budget includes money for 11 extra Lockheed F-35 fighter jets, five more Boeing F/A-18E/F Super Hornets and seven more E/A-18G Growlers.
But that doesn’t necessarily mean the procurement dollars will flow unabated.
“The counterterrorism fight is here to stay and will continue to use resources that, at one point, the DoD thought would shift over to stuff like sophisticated electronic warfare capabilities geared more to fights against adversaries that have sophisticated air force systems,” said Andrew Hunter, director of the Defense-Industrial Initiatives Group at the Center for Strategic & International Studies.
‘Inflection Point’ Ahead
While the 2016 defense budget has gotten bigger, having to rely on Congress to pay for items that the armed services put on their unfunded requirements wish lists “is not a way to plan your future,” said Mark Bobbi, an aerospace, defense and security analyst at IHS.
“Who knows what the U.S. economy will look like next year?” he told IBD. “It’s looking flat or even might move into recession.”
He expects the fiscal 2017 budget, which will likely be decided in late 2016, to be an “inflection point” for some major programs.
The long-range strike bomber, which Northrop Grumman (NYSE:NOC) won earlier this year over a Boeing-Lockheed team, is likely safe, along with Boeing’s KC-46 tanker, Bobbi said.
But the $400 billion F-35 program is “sticking out like a sore thumb,” and the Air Force is pressuring Lockheed to lower costs for the overbudget and behind-schedule program, he added.
Next year will also be a big one for the KC-46 tanker program, which has had its own share of cost and development problems, as Boeing tries to get the plane back on track and into production, said Hunter.