US defense industry must expect less COVID-19 stimulus as it outperforms the market

Following yesterday’s communication from Rep. Adam Smith, chairman of the House Armed Services Committee, on upcoming COVID-19 stimulus packages;

Nicolas Jouan, Aerospace and Defense Analyst at GlobalData, a leading data and analytics company, offers his view on the situation:

“Rep. Adam Smith did not surprise anyone when he hinted towards a reduction of stimulus funding allocation for the US defense industry during a call with reporters on Wednesday. For weeks, interest groups in Washington D.C. have militated for a slowdown of money stream directed at players of the defense industry, considering that defense was generally more sheltered than other parts of the economy with a baseline budget of US$738bn for the current fiscal year and government financed backlogs for the years coming. Last month’s CARES Act emergency package also included US$10.5bn for the Department of Defense destined at Defense Health Programs and extra funding for National Guard deployment related to fighting the COVID-19 pandemic. The CARES Act also included US$17bn for firms deemed critical to national security.

“It is therefore becoming clear that the Pentagon and players of the defense industry should not expect more financial help from the federal government, at least in the short term. In fairness the Pentagon has already acted on its own with the decision in March to temporarily increase periodic progress payments boosting cash flow to defense contractors.

“Recent Q1 2020 earnings releases of pure defense players such as Lockheed Martin (+9.2% sales y-o-y) or Northrop Grumman (+5% sales y-o-y), generally outperforming the market, tend to confirm the idea that defense companies are largely sheltered from immediate COVID-19 impact. These companies are in fact more impacted by factory closures and interruption of production generated by the spread of the disease, one example being when Lockheed saw two F-35 assembly lines shutting down in Japan and Italy in March, than by actual shortage of cash flow.”

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