00:00That was President Trump at the White House earlier. He said a lot that we want to unpack
00:04with you. Are we in good shape when it comes to munitions? You were in D.C. this week, right?
00:09Yeah, we attended a conference called the McAleese Conference. Jim McAleese is
00:13an expert in bringing folks from the Department of War together, whether it's Army Secretary,
00:18Navy, Air Force, and critical weapon systems. And the theme there, very, you know, clearly all
00:24appointed by the administration. So there's a view there. $1.5 trillion budget is going to come out
00:30from the president's request at the end of April and May. That's kind of new. It's delayed. We
00:34thought any day now, but we know it's going to be at the end of May, end of April, and
00:38they're
00:38sticking to their $1.5 trillion. And I don't know how Democrats will align with that. With that,
00:44you know, President Trump's comments, I don't know if we're at unlimited stocks of missiles and
00:48munitions, but that's one thing that's clear from all the DOD employees is all the Department of
00:53War folks is that missiles is the best part of the market in terms of growth to invest in for
00:58investors. And that's why you're seeing, you know, 4x production increases. So what the Department
01:05of War has done working with multiple primes like Raytheon, like Lockheed, is to put forward
01:11frameworks on missile production, saying over the next seven years, we'll guarantee you production
01:16increases on a PAC-3 missile from 600 units a year to 2,000 units a year, which is a
01:23big revenue
01:23bump. And we will guarantee that for the next seven years. So can you build enough capacity
01:29to do that?
01:29Can they?
01:30Well, they're working on it. And I think that's a theme that the Department of War,
01:34more than anything, could align on, whether it's Republicans or Democrats, is that, you know,
01:39there isn't unlimited supply. And what we do manufacture from a missile perspective is quite
01:44expensive. We're doing it in low quantities. So we have to do it in larger quantities and also
01:49find ways of manufacturing cheaper munitions and missiles.
01:52The president's comments about what Raytheon is doing, building four factories, Lockheed
01:56building five or six factories. Does that align with what these companies have said publicly?
01:59Yeah, we're seeing 30% increases in CapEx for basically 15 to 20% of their revenues.
02:07We continue to see 8%, even though we're hold rated, 8% upside in our estimates if Raytheon and
02:13Lockheed could actually meet these frameworks. And those are only three that have been announced
02:17thus far. I think you'll see more to come. There's dozens of offensive and defensive missiles. We
02:22put out a missile primer today and folks were emailing me, well, you missed this one. Well,
02:26you missed this one. I was like, well, there's so many opportunities to continue to invest. And I
02:31think that's one thing the government will agree on.
02:33I mean, it's a whole supply chain, right? It's the suppliers. I mean, when you look at it,
02:37we obviously talk about the big defense companies, whether it's Lockheed Martin, whether it's RTX,
02:42but there's a ton of American companies, right, that are going to be impacted by this.
02:46We're trying to find ways that might not be as obvious, that have also really great margins
02:51associated with it, and might not have to have the massive capital expenditures without the share
02:56repurchases. So like Woodward is a great way to play it. Solid rocket motor providers, you know,
03:01even Heiko that does missile components, Elbit and Israel. So there's a whole slew of ways to play
03:07missile defense and offensive missiles.
03:10So not just US, obviously.
03:11Yeah. And like, you know, I would say Howmet and Woodward are great ways to play it that
03:15traditionally people might not think of.
03:17Can I just ask you, what is the supply chain like for defense companies? Is it a global one?
03:22No, it's mostly in the US. It's US, but what the government's trying to do is a dual source it
03:28in
03:28the US. So having multiple suppliers because the capacity increases are going to be pretty significant.
03:33So I hear you talking about the opportunity that these primes have ahead of them. Yet you,
03:37as you mentioned, you still have a hold rating on RTX, Northrop Grumman, Lockheed Martin. What would
03:43prompt you to change those to buy ratings?
03:45I think the Department of War, one of the things that they've done is have has guaranteed the top
03:50line, but they haven't guaranteed margins associated with it. On top of that, the primes have to invest
03:56their own capital, cut their repurchases in order to invest in the CapEx themselves. So at the end of
04:01the day, it doesn't change their EPS algorithm much. It actually keeps it the same, even though
04:06they're investing for the Department of War much more. And that was part of the executive order
04:10President Trump put in at the start of this year. He said, I'll give you these frameworks. I'll boost
04:14the budget. But we haven't seen margins associated with it. And of course, some visibility as they
04:19finally have five, seven year contracts should be helpful in margins, then they don't have to re
04:24negotiate a contract term every year. Having said that, we have an administration that when it
04:28identifies something as important to national security, they get kind of more aggressively
04:33involved, whether it's the semiconductor space, whether it's rare, you know, earths and rare
04:38minerals. And I just wonder, is there something more that we would anticipate from the
04:42administration, this administration, when it comes to defense companies, whether it's taking a stake,
04:47making some further investments? I'm just curious what you are hearing.
04:50I think they'll continue to do that, whether it's providing frameworks, so they'll allocate the
04:56dollars, so that'll be big contracts. So the primes will have no choice, but to invest,
05:00it won't be, you know, kind of wishy washy, like we're only going up five, it'll be 600 to 2000.
05:06So
05:06the capex investment is needed is critical, there's a seven year time horizon. So first,
05:11we'll see more long term frameworks, right? Second, I think you could see some stakes,
05:15we've seen some of it already. Yeah. Of course, these primes don't have infinite capital. And like,
05:20they're already spending a big chunk of their capex now associated with missiles. So if there's more and more
05:25needed, you could see the government get involved. Can I just ask you to shift to drones? Are more
05:30drones? Like, I think this war has been a fascinating, well, fascinating is a bad word to use.
05:35We've seen the way that it's fought different than previous wars. Yeah. Like, is there a shift in
05:41terms of the kind of weapons that these companies want to be working on or are working on in the
05:48future? Or does that kind of get sidelined as a result of these orders from the government?
05:52There's so much going on, right? So with Russia and Ukraine, I think you've seen 70% of the
05:56fatalities associated with drones. But that's not the kind of drone warfare the US might use. So we'll
06:02need more maneuverability, more electronic warfare with drones. But the key, I think, whether it's
06:07missiles, munitions, or drones is ability to manufacture it today, readiness, and scalability,
06:13doing it in the hundreds of thousands, not only 100 or 200 or 2000 units, even, which is what we've
06:19seen from at least Russia, Ukraine, Iran, is they manufacture missiles in the thousands,
06:26not smaller quantities like we do. How are you looking at magazine depth in the context of
06:31comments that we heard from the Secretary of Defense earlier today? He said in the Oval Office,
06:36missiles being shot down, shot are down over 90% since the beginning. One-way attack drones down over
06:4190% since the beginning. The US is going after Iran's industrial base. Does that mean a lot of the
06:47munitions that we've used up, or have used, those will not be used in the coming weeks or months,
06:54depending on how long this goes, just because Iran's capabilities have changed?
06:58You know, I'm not sure how Iran stockpiles look. But what we're doing is very expensive.
07:03I don't know how much the war is costing, but it could be 10 billion in debt.
07:07So 200 billion more is what? Yeah. So over the last 18 days, I mean, it's very expensive what we're
07:13doing. So we have to, a theme is like readiness, scalability, and also affordability. We can't
07:18manufacture, shoot down objects with $5 million missiles when they have $50,000 missiles. So we
07:24have to come up with ways. And that's what's really driven, like the, this administration has
07:29been super supportive of startups, the defense tech names in the world. It's led by Andrel,
07:34that's more publicly known, but there's a whole bunch of names we cover, like Voyager that are out
07:38there, trying to take a piece of the pie that was previously not given to them.
07:44Hey, I want to bring in a question from our Wayne Sanders, who we talked to a lot about.
07:47He's down in Washington, and part of our Bloomberg Intelligence team. But he said,
07:52which programs are most at risk of funding versus revenue due to execution or industrial bottlenecks?
07:57That's such an interesting question, because I asked Jules Hurst, who's the DoD comptroller.
08:01So think of him as the DoD CFO managing about $1.5 trillion. And this week, I asked him,
08:07what do you think is going to get cut if you, the Democrats don't approve your $1.5 trillion budget?
08:12And he's like, I had a hard time getting to $1.5 trillion. I had to cut to get there.
08:16And I was
08:17like, the budget today is $1 trillion for context. So $1.5 is a significant increase. So the Republicans
08:24are going for full steam increases across everything, essentially. And I think historically,
08:30what's been thought of as areas that will be reduced is F-35, a fighter of the past, or helicopter
08:36spending. And we're seeing that, obviously, come into the forefront of conflicts like Venezuela
08:41and even Iran, right? Where we're using older aircraft and the need for it, it's kind of
08:48reignited that need.
08:49Can you believe we're talking about the F-35 as being something of the past, given how much
08:52we spent on it?
08:54For investors, it was something of the past, but it's actually driven a revival in Lockheed stock,
08:59which has been leading the primes in terms of performance, as we've seen it used multiple
09:03times. So it's had a bit of a rebirth.
09:07Okay. All right.
09:08Do we have time for a quick question on airlines?
09:10Like, what do we need to know right now?
09:12I think, you know, basically, this is a month of COVID for airlines in the Middle East. You know,
09:17you're seeing capacity cut 80%. So a lot of work is being done on how does that impact global air
09:22traffic, up 5%, Mideast accounts for 10%. How does that hit, number one, global air traffic,
09:28global aftermarket demand? And then how does that hit sticker shock for folks buying airline
09:34tickets in the U.S. as oil goes to wherever it's going to go?
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