To download the 155+ page fiscal 2014 Defense Appropriations bill, please click here.
On Tuesday, the House Appropriations Committee released the subcommittee draft of the fiscal year 2014 Defense Appropriations bill. The bill provides for $512.5 billion in non-war funding, an amount that completely ignores the level that would be caused by automatic sequestration spending cuts (to the tune of over $28 billion). The House’s proposal is also $5.1 billion below fiscal 2013 levels and $3.4 billion below President Obama’s request. In any case (whether the bill in current form is implemented or if sequestration takes hold and further spending cuts are put in place), the trajectory of defense spending for fiscal 2014 relative to fiscal 2013 is down.
The fiscal 2014 Defense Appropriations bill includes $85.8 billion for ongoing military operations in Afghanistan. This amounts to a reduction of about $1.5 billion from last year’s level, and we think firms like Alliant Techsystems (ATK)–the largest US producer of the small-caliber ammunition—will continue to feel the pressure from cuts in this area. Revenue in ATK’s defense segment, for example, fell nearly 27% in its most recently-reported quarter.
Defense-related research and development spending will also take a hit during fiscal 2014. The bill contains $66.4 billion for research, development, testing, and evaluation of new defense technologies–$3.5 billion below last year’s level. Still, a number of programs received funding, including the controversial F-35 Joint Strike Fighter—undoubtedly a relief for prime contractor Lockheed (click ticker for report: ) but also for principal partners in the project: Northrop Grumman (click ticker for report: ), BAE Systems, and United Technologies (click ticker for report: )—the latter providing the F135 propulsion system. By all accounts, the F-35 is a fantastic fighter aircraft, though it will be the Pentagon’s most costly program in history, already ringing up a bill of $396 billion.
Other key research and development funding areas will provide some support to Boeing’s (click ticker for report: ) defense segment. The aerospace giant’s KC-46A aerial-refueling tanker program, which will work to replace roughly 100 Eisenhower-era KC-135 Stratotankers, remains a must-have development platform for the Air Force. Boeing’s P8-A Poseidon, a long-range anti-submarine aircraft based on the commercial 737-8, is a favorite of the US Navy. Key Poseidon suppliers include Northrop Grumman, which provides the electronic support measures system, Raytheon (click ticker for report: ), which makes the maritime surveillance radar, General Electric (click ticker for report: ), which supplies the flight-management system, and Spirit Aerosystems (click ticker for report: ), which makes the plane’s fuselage and airframe tail sections/struts.
Interestingly, the new Air Force Bomber program will receive funding during fiscal 2014, though we note the program is “completely” classified. The Broad Area Maritime Surveillance (BAMS) program remains in focus, which should support Northrop Grumman’s unmanned aerial vehicle, the MQ-4C Triton. In fact, unmanned aerial vehicle (UAV) research will help a large number of defense suppliers, not the least of which are AeroVironment (AVAV)—which makes UAVs for a wide range of applications—and Textron (click ticker for report: )—which continues to experience higher ‘unmanned aircraft systems and weapons and sensors’ volumes. Other key funding areas include the Navy’s Future Unmanned Carrier-based Strike System, the Ohio-class submarine replacement, the Army and Marine Corps’ Joint Light Tactical Vehicle, and the Army Ground Combat Vehicle programs.
The fiscal year 2014 Defense Appropriations bill allocates a total of $98.4 billion to equipment procurement, which is $2 billion below last year’s mark. Included in that tally is funding for eight Navy ships, including two SSN-774 Attack Submarines made by Huntington Ingalls (HII) and General Dynamics (click ticker for report: ), 29 F-35s, 21 of Boeing’s EA-18G Growlers, 73 UH-60 Blackhawk and 37 MH-60S/R helicopters (both made by United Tech), and 18 of Lockheed’s C-130J variants.
Valuentum’s Take
It appears that the only uncertainty is the magnitude of defense spending cuts, as fiscal 2014 will be a down year no matter what (even if Congress avoids sequestration). There are certainly pockets of strength in the defense industry, but we prefer more diversified firms that are also exposed to the commercial side of the aerospace business (not just defense), namely Boeing and United Technologies. In the portfolio of our Best Ideas Newsletter, we favor the commercial aerospace supply chain the most, with positions in Astronics (click ticker for report: ) and Precision Castparts (click ticker for report: ).