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A Closer Look at Trump's 10% Defense Spending Increase

Investors are optimistic, but we see many unknowns.

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Reports surfaced this week that President Donald Trump’s administration plans to increase fiscal 2018 defense spending significantly. The administration’s initial statements coupled with the budget and political environment confirm our forecast of around $650 billion in defense spending for fiscal 2018, of which $625 billion-$630 billion will go to the Department of Defense. We view the major defense contractors we cover-- Lockheed Martin (LMT),  Northrop Grumman (NOC),  Raytheon (RTN),  General Dynamics (GD),  Boeing (BA), and  L3 Technologies (LLL)--as fairly valued to overvalued. We think investors are pricing in sizable defense spending increases with little regard for the hurdles the defense budget will need to surmount. A budget outline should go to Congress by March 16 with a more detailed plan anticipated by May. If spending levels come in higher than we expect or certain programs receive funding increases, we may revisit our fair value estimates.

New Office of Management and Budget head Mick Mulvaney outlined a base defense budget, which excludes funding for overseas contingency operations, of $603 billion. Predictably, confusion has set in regarding the actual increase the Trump administration is looking for and what this means for the industry. We’ve seen reports of a $54 billion increase in defense spending, Sen. John McCain complaining about only getting a 3% increase, and other reports mentioning a 10% increase.

Chris Higgins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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