During July, many of the world's largest companies in the defense and air force industry presented their reports for the second quarter. Overall, it was cheerful tones and several of the large American companies took the opportunity to raise their guidance for the full year. United Technologies, Honeywell International and Lockheed Martin all of them raised their earnings forecasts, while at the same time United Technologies showed a 9 percent increase in revenue in the aviation division during the quarter.
Increased budget appropriations
An important puzzle piece for what future revenue streams will look like for these companies is how large investments are made by the US defense. That, in turn, is determined by a budget set by the government. In July, a new agreement was reached regarding this budget. The agreement proposes that the appropriations for the defense should amount to $ 738 billion in 2020 and that they should be increased in 2021. The figure indicates a significant increase in appropriations which in 2018 amounted to approximately $ 634 billion.
Source: Statista
Strong development and low valuation
In addition to increased US budget allocations, there are a number of other factors that point to a good development for the defense companies' share prices going forward. These include the companies' strong profit growth, increased acquisition activity in the sector (see the recently announced deal between United Technologies and Raytheon) and (unfortunately) the many ongoing and potential military conflicts that exist in the world.
To these catalysts can be added a historically low valuation of the sector.
The major US defense companies traded for a little more than 14 times the estimated profit for next year. This is a 5 percent discount compared to historic average levels and a 5 percent discount to other shares in the Dow Jones Industrial Average Index. That gap should be closed again if the defense companies continue to deliver sustained strong profit growth. In addition, these companies have historically shown that they can handle downturns on the stock exchange relatively well - a not unimportant detail when the US-China trade conflict is now again in focus on the market.
