Skip to Content
Stock Strategist Industry Reports

Budget Deal Boosts Defense

But we expect a repeat of the 1980s, with a buildup followed by cuts.

Mentioned: , , , , , ,

Congress and the White House passed a bipartisan budget deal on Feb. 9, which included large increases in defense spending for fiscal 2018 and 2019. Defense stocks are moving up on the news, but we had already increased our fair value estimates after initial reports regarding the deal began to surface. As a result, we still view the sector--including  Boeing (BA),  General Dynamics (GD),  L3 Technologies (LLL),  Lockheed Martin (LMT),  Northrop Grumman (NOC),  Raytheon (RTN), and  TransDigm (TDG)--as fairly to slightly overvalued.

We think defense spending should provide a tailwind to revenue growth over the near to mid-term for the companies we cover, but with profits at all-time highs, we’re not forecasting significant margin expansion. Longer term, we don’t see defense spending going much higher than the top line for fiscal 2019, given pressure from increasing budget deficits. Absent entitlement reform, we think we’ll witness a replay of the 1980s buildup: Despite a strong economy, President Ronald Reagan cut defense spending in the back half of his administration because of high budget deficits.

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

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.