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00:00Wayne, good to see you. I want to start with a bit of news that broke a short time ago.
00:05The Trump administration notifying Congress that it plans to sell Saudi Arabia up to 48 F-35 warplanes.
00:12This, I know, is a deal that had been in the works for years, really.
00:15It's said to be worth as much as $24.5 billion.
00:19Who stands to benefit the most from that deal?
00:23Yeah, thank you so much for having me on.
00:25I think the short answer, obviously, is Lockheed ends up being the biggest beneficiary for this, obviously, for F-35
00:32as part of the integrators.
00:33But I think the most important piece that's out for this is that it also ties in Saudi Arabia into
00:40the American combat ecosystem for the next 20 to 30 years.
00:44So it goes just beyond that.
00:46It also ties into the rest of the integrators that play a part in this between RTX and Pratt &
00:51Whitney engines as well that are a part of this.
00:54But all of this to say that it's not just the $24 billion up front.
00:58It's also dealing with all the rest of the maintenance and repair operations, the MRO that goes along with this,
01:05sustainability and lifecycle maintenance that goes along.
01:08So this is actually a pretty big move at this point.
01:11You know, Wayne, I know that Lockheed is the main, Lockheed Martin is the main contractor here for this warplane.
01:16I looked at the stock and I expected to see a big bump up.
01:20It was up just fractionally today.
01:21Any just thoughts on why that may be or I don't know if you spoke to anybody about it?
01:26Yeah, you know, I think we're all kind of sitting in the same space where it's defense demand has not
01:30stalled.
01:31And, you know, obviously, you can see that it has gone through the roof, but the stocks have stalled.
01:36Investors right now are looking at the contract headlines and asking whether or not those commitments are going to turn
01:41into deliveries, revenue and free cash flow.
01:43So right now, the primary the primes are currently in the investment phase.
01:47They're expanding their factories, hiring workers and rebuilding suppliers.
01:51Right. That's one of the big areas right now that you're seeing them do because of some of these multi
01:55year framework agreements that the administration has put out to really show everybody across the industry,
02:02even their two to two and tier three suppliers that this is a long game demand.
02:06This is not a hey, we're really, really excited about it this year and it's going to go away next
02:11year.
02:11But some of that still takes a little bit of time.
02:14And the election does add some uncertainty over the size and timing of that FY 27 funding.
02:19I think I was on this.
02:20What does this higher defense spending in Europe around the world?
02:24I mean, can't that help out?
02:26Yeah, I think it I think it absolutely does.
02:28You know, we talk about the Saudi Arabia piece, but not just that.
02:32The epic fury, the DOD's inspector general put out a report that talked about forty four billion dollars worth of
02:39foreign military sales that are going towards Gulf states,
02:42as well as NATO continues to be pushing towards their three and a half percent up to their five percent
02:47limit that they were that they agreed to spend towards defense.
02:50These are all areas that are great to get the dispense spending started.
02:54The problem is that when it comes to manufacturing and actually bending metal, these are things that take a long
02:59time.
03:00So if you don't already have, you know, hot production lines that are doing this is something that you're pretty
03:05much starting.
03:06It's like going to the gym, you know, in your like, oh, I'm going to start benching three hundred and
03:10fifty pounds.
03:10Well, if you haven't been doing that for a while, it's going to take you a while to get there.
03:14And I think you see some of that in different pockets across NATO, Europe, Asia, as well as in the
03:19Gulf states.
03:19So that said, what's your longer term outlook for defense at this point?
03:23I think it's still very, very strong, especially when you start looking at if you take the Pentagon base budget,
03:30you take the Saudi Arabia deal as well as NATO and allied demand for a lot of defense capabilities right
03:36now.
03:37All of those things equal sustainable, higher production.
03:40Those are all indicators right now that as these manufacturers start to come up.
03:44Right. When we talk about, you know, PAC three interceptors going from six hundred and fifty to two thousand interceptors
03:51per year,
03:52the demand is still greatly beyond that.
03:54But what you are is you're moving the needle for these manufacturers who are building the plants,
03:59who are building the production facility.
04:01And then you'll start to see that demand start to catch up.
04:04And then you also have defense areas.
04:06We keep always talking about like exquisite interceptors like the PAC three interceptor for four million dollars.
04:11Well, a lot of countries are putting out demand saying, I don't need something that exquisite.
04:15I need something that might I can shoot down some of these ahead one, three, six drones and others.
04:20So I'm looking for twenty thousand to fifty thousand dollar solutions as well.
04:24But Wayne, could a possible juggernaut here be the midterm elections?
04:28Because some are saying, look, if we see if we wind up with a blue wave and Democrats take control
04:33of both houses,
04:34are we going to see a pullback in defense spending?
04:37Does it spell trouble for military contractors?
04:42I think the top line is OK.
04:44I think where you really have to figure out if it ends up going into a blue wave,
04:48I think what you're going to see is the supplementals will be submitted specifically for specific programs as about as
04:55opposed to this three hundred and fifty billion dollar reconciliation bill added onto the top line of the one point
05:00one five trillion.
05:01So what I mean by that is instead of taking huge programs and throwing them all in and saying, hey,
05:07we want to up all of these games,
05:08you have to come back and say, OK, I want to talk specifically about interceptors.
05:13I need a supplemental that's going to be forty billion dollars specifically for pack three and fat interceptors and beyond.
05:19And they're going to have to be able to justify that and then approve those individually because that you can
05:24see right now from a national security perspective, there is a need for these.
05:28I don't see the need going away and I don't see Congress stopping to to say, oh, we don't need
05:34those anymore.
05:35But what they are going to do is say, we're not going to write you a blank check for three
05:38hundred and fifty billion dollars and then come back and tell me what you spent it on.
05:42It's going to go back more to what you saw somewhat under the Biden administration where you have to do
05:47what are called key line reviews.
05:48And they're going to say, we gave you this amount of money for this program.
05:52You show me where you spent it.
05:54And then if you need the supplemental, you need to be able to come back, ask us for more money
05:57for each specific program instead of these larger blank checks.
06:01Colonel Sanders, earlier you mentioned Lockheed Martin.
06:04I want to point out an article that's just out.
06:05The Pentagon and Lockheed, they're moving to speed up the production of this new classified air to air missile.
06:11What more can you tell us about it and the importance of it?
06:15Yeah, so absolutely.
06:16So the AIM-260, it's called the Joint Advanced Tactical Missile, the JATAM.
06:21It's been out there for a little while in terms of trying to reach production limits.
06:25Right now, the standard is RTX's AIM-120.
06:29It's a medium range air to air missile called the AMRAAM.
06:32You might have heard people talk about it.
06:33This JATAM is supposed to be one of the future ones that we're looking at right now,
06:38especially when we consider a China, you know, Indo-Pacific type capability threat for a peer to peer adversary.
06:45So when you look at the Saudi Arabia stuff, that F-35 is more about Iranian deterrence.
06:51And then you look at the JATAM, what's coming out right now, and that is looking towards the future potential
06:55consideration for a China scenario.
06:58And that tactical missile, one of the nice things about this is that it fits into an F-22 and
07:05an F-35 with potential for integration into an F-16 and an F-15.
07:09What does that mean to somebody who doesn't study defense all day?
07:13It means that it can be interoperable.
07:15You can build it at a higher scale because you're not just building it for one platform.
07:19You can pretty much put it on the line and say, build me as many as you possibly can.
07:24It's needed for a threat, something as a peer to peer adversary because of its speed, range and maneuverability.
07:31That's really what you're looking for, because most of our peer adversaries have the ability to knock down conventional munitions
07:37if they're just traveling in a straight line.
07:39So all these additional types of capabilities right now are to try and evade and get by or obfuscate capabilities
07:47that exist like Russia or China would have.
07:49And we're speaking with Bloomberg Intelligence Senior Defense Research Analyst Colonel Wayne Sanders.
07:54Colonel Sanders, when you look at the big contractors, who is best positioned, I guess, for growth in the short
08:02term?
08:04Yeah, I would say, you know, you have Lockheed, RTX and Northrop because they are tied to the munitions side
08:09of the house, right?
08:10All hands on deck right now to be able to raise all of these production lines.
08:15And that's where you're seeing a lot of the framework agreements coming from.
08:18L3 Harris is a big one as well because of their missile solutions.
08:22They play a big part in this.
08:24You also then have some of the tech disruptors who have a play in this as well,
08:28because you're now looking for those low-cost containerized munitions or low-cost cruise missiles.
08:33And the DOD had pushed out, specifically asking for five different companies to start looking at those.
08:39Those are those $20,000 to $50,000 solutions instead of multimillion-dollar solutions.
08:44So Coaspire, Leidos, Anduril, and Castilian, and Zone 5 all play within this.
08:53They all have the contracts right now to try and get 20,000 to 30,000 of these missiles so
08:59that we have scalability for things like drones and those slower ballistic missiles.
09:04So on the flip side, then, who's having the toughest time, short-term, let's say?
09:08Yeah, I would say I think right now some of your standard lower ground, I hate to use this phrase,
09:15but the ground pounder capabilities, right?
09:17We've seen the Army be a bill payer for a lot of different things, unless it is tied to these
09:22long-range munitions like we're talking about.
09:25They end up looking at it as, hey, we have great capabilities on the ground, but we're not seeing a
09:31whole lot in terms of a demand for a ground fight,
09:34unless we're going to go and put tanks over in Europe, right?
09:36We don't need those so much for a fight against a peer adversary like China.
09:41So if you are looking at that, you're going to see more on the strategic bomber side of the house
09:46and anything that's longer range because we have to be able to reach that.
09:49So I think that's where your bill payers are going to come from.
09:51And from your perspective, biggest hurdle that defense stocks may be facing in the next year or so?
10:00Yeah, I think it's going to end up being when you put these on paper, on contract, right, putting up
10:05these additional lines, some of these still take a couple of years.
10:08You know, when we talk about Lockheed going from $650 to $2,000, that is a seven-year framework agreement.
10:14That's not something that happens overnight.
10:16Do I think that Lockheed and RTX are going to beat their projections for the year-over-year, specifically in
10:23terms of how many they're actually putting out?
10:25I do.
10:26I think they're actually doing a very good job there.
10:28But it does not happen overnight.
10:30So when investors are looking, going, hey, we saw this deal come out last year.
10:34Why are we not at $2,000 interceptors for PAC-3?
10:37Why are we not at, you know, $500 of a different type of munition?
10:42It's because these production lines still have to be built in some, and they still have to be able to
10:46throw out.
10:47And the supply chain does play a part in this as well.
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