It's been about five months since I last discussed the government contractors as investment vehicles.
Since then, a series of important issues have arisen that warrant addressing the situation again. Principal among them is the publication of the fiscal year 2016 Department of Defense (DOD) Budget Request, and the Asian Infrastructure Investment Bank (AIIB) having begun to accept founding members.
On the defense budget, much of which will be allocated to the largest government contractors, the base request from the DOD for 2016 at $534.4 billion represents an approximate 8% increase over the 2015 budget of $496.1 billion, which was actually $200 million smaller than the 2014 budget.
The executive branch is seeking to push this to $561 billion, which would be 13% above the current known fiscal-year allocation.
The importance of this is that it is a reversal of the attempt to decrease the defense budget and allocate resources to domestic infrastructure programs announced by President Obama in his 2014 State of the Union address.
In addition to the base funding request for 2016, the DOD proposed a 13% reduction in supplemental appropriations to $50.9 billion from $64.3 billion for 2015.
However, since the budget request was made by the DOD in February, the proposed supplemental part of the budget has been increased by Congress to about $96 billion, which would increase the supplemental by 88% instead of reducing it by 13%.
All told, if the executive and legislative branches get everything that's being proposed and debated now, the DOD budget for 2016 could be a whopping 17% above 2015.
I don't think that will happen, but it's clear that both the executive and legislative branches are in agreement on increasing the DOD budget substantially, after having decreased it by about 4% in total for 2015 from 2014.
What's most interesting to note about this from an investor's standpoint is that most of the stocks of the government contractors have not reflected optimism that this will cause revenue and earnings at these companies to increase and thus justify higher stock prices in anticipation.
Since I last discussed the issue in December, Science Applications International (SAIC) and CACI International (CACI) are about unchanged. General Dynamics (GD) is down 5%, Lockheed Martin (LMT) is up 6% and Raytheon (RTN) is up about 2.6%.
The biggest positive movers have been Northrop Grumman (NOC), which is up about 12%, and Boeing (BA), which is up about 24%.
The Boeing move is the outlier here but reflects the issues I discussed in December and brings it more in line with the positive performance of the others over the past 12 months.
It's also continued to be the most aggressive at stock buybacks financed by earnings, with the float decreasing by another 1.2% since early December.
I'm not sure why investors have not had an appetite for the government contractors recently, other than Boeing, but I think it's logical to conclude that they will benefit greatly from an increase in DOD spending that will clearly be in excess of GDP growth, and that these stocks should start to exhibit that expectation by investors soon.
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