The incoming commander-in-chief has jawboned Boeing over the cost of building a next-generation Air Force One and trash-talked the F-35 Joint Strike Fighter. But that hasn’t stopped defense stocks from soaring as the new administration prepares to take office.
Since the beginning of October and through early January, America’s “51 largest publicly traded defense and aerospace contractors saw their collective market share increase by $49 billion, up 11 percent overall,” according to analysis by the Washington Business Journal. The biggest gainers include Atec, up 47 percent, Mechanical Technology, up 45 percent, and CPI Aerostructures, up 36 percent.
The largest contractor, Boeing, with a market cap of $97.7 billion, closed at $158.32 a share on Wednesday. That is a gain of more than 16 dollars a share since Election Day – and even after president-elect Donald Trump criticized the multibillion-dollar price tag on new presidential planes Boeing is building.
On Tuesday, Boeing CEO Dennis Muilenburg conferred with the president-elect at Trump Tower – his second meeting -- and emerged saying that he had an "excellent conversation" with Trump that could lead to a deal "in the very near term," Reuters reported.
Lockheed Martin, however, hasn’t fared as well as other aerospace and defense contractors: It closed at $254.07 Wednesday, up just 61 cents since Trump defeated Hillary Clinton. But Trump had especially harsh words for the company, tweeting in early December: “The F-35 program and cost is out of control. Billions of dollars can and will be saved on military (and other) purchases after January 20th.” And the head of BAE Systems, which is involved in the F-35 program, said at the World Economic Forum in Davos earlier this week that Trump wants a 10 percent reduction in costs.
Lockheed Martin is responding to Trump’s pronouncements. On Jan. 13, Lockheed Martin CEO Marillyn Hewson said after talking with Trump for a second time that the company was close to a new contract that would cut the cost of the F-35 program and create new jobs, according to The Los Angeles Times.
Beyond the apparent willingness of both defense companies and the incoming administration to work together, investors in defense stocks may be buoyed by Trump’s appointment of so many former military officers to his administration, including National Security Adviser Michael Flynn, the former general whose consulting firm had deep ties to defense contractors.
But perhaps the biggest factors driving the run-up are Trump’s campaign promises to rebuild American military might and his pledge to eliminate the defense “sequester” – automatic caps on spending put into place in 2011.
Senate Armed Services Committee Chairman John McCain referred to that pledge last weekend as he released a proposed $640 billion defense budget for fiscal 2018 – some $54 billion higher than what had been put forward by outgoing President Barack Obama.
According to The Hill, McCain’s proposal “combined with a projected $60 billion for a war fund known as the Overseas Contingency Operations (OCO) account” would jack the defense budget up to a total of about $700 billion.