The U.S. Army is looking to preposition equipment around the world to keep it in close proximity to potential flashpoints and to assist with training missions with partner nations. Army officials have said the current plan will call for approximately 11,000 Mine Resistant Ambush Protected Vehicles to be scattered globally in strategic locations, arguably places terrorist elements believe have the least resistance.
Share prices in the commercial aerospace industry have outpaced the broader market, growing ~80% since 2009, compared with ~20% growth in the S&P 500 over the same timeframe. Commercial aerospace firms saw their businesses and public valuations pummeled in 2009 during the worst of the “Great Recession”, but the cyclical industry has since rebounded considerably.
The U.S. Defense Department could face up to $100 billion in budget cuts under any deficit reduction deal, according to the chairman of the U.S. Senate Armed Services Committee, Senator Carl Levin. These cuts would be in addition to the $487 billion the Pentagon already plans to reduce its projected spending by over the next 10 years.
For public companies in the government services sector, the past few months have been discouraging. After steady improvement during 4Q11 and 1Q12, the median market multiples (enterprise value (“EV”) / trailing twelve months (“TTM”) EBITDA or revenue) for government services touched recent lows in early May.
The DoD has announced that it is working to increase and broaden U.S. military relationships with India, Vietnam, and other Asia-Pacific countries, “transitioning [U.S.] defense trade beyond the ‘buyer-seller’ relationship to substantial co-production and, eventually high-technology joint research and development.” According to U.S. Defense Secretary Leon Panetta, up until now, export restrictions and controls regarding such practices have made these types of relationships near impossible.
May was another busy month in the Cyber / Intel arena, with a significant increase in venture capital activity and news regarding the ever-increasingly precarious cyber threat environment grabbing headlines. Researchers in the UK found embedded hardware “backdoor” vulnerabilities in chips commonly used in defense applications and news of more large-scale data losses surfaced.
We’ve been thinking about the current budget dialog (including sequestration) and the havoc it is causing on internal defense contractor financial/strategic planning, as well as the potential resulting impact on the attractiveness of available M&A targets that address capability gaps in the implied strategic growth areas outlined by the current Administration—particularly cyber.
The DoD’s growing inventory management problem emerged in headlines this week after a former DLA director, Keith Lippert, warned of an impending “inventory crisis” as agencies are faced with the cost of eliminating excess goods currently in store and dealing with the flood of items that are returning from conflict zones overseas. According to DoD estimates, the current excess could be valued at $9 billion within an overall inventory valued at ~$100 billion.