Small-Cap Defense Companies
Apr 26th, 2007 | By Penny Sleuth Contributor | Category: International, Investing StrategiesThe Senate looks set to pass a bill today telling the entire Middle East when the United States will surrender.
It’s all for naught, though, as the number of votes will not tally to a two-thirds majority, making a presidential veto a foregone conclusion.
No matter what your opinion has been on the Iraq War thus far, one thing is clear: Defense stocks have been great investments. And they continue to perform.
Yesterday, Boeing (BA: NYSE) reported a 1Q07 profit increase of 27%. Not only is its commercial aircraft business doing well, but its defense business grew a full 7.4%.
Raytheon (RTN: NYSE) reported a 21% increase in earnings, helped by sales of missile and integrated defense systems.
General Dynamics (GD: NYSE) reported a 16% rise in net income. In the past quarter, its won some key contracts for new ground vehicles, a key tool in America’s current war.
But how long will this spending last?
Raytheon and General Dynamics, while posting great results, are starting to get cagey about future prospects in the defense segment. Both powerhouses don’t want to raise guidance in the midst of President Bush and Congress duking it out over defense spending and troop withdrawals.
But we’re still bullish on defense. It’s still one of our major themes in Small-Cap Strategy Report.
We firmly believe that even in the event of a defense budget cut, best-of-breed small-cap defense companies will still win meaningful contracts. And those contracts will significantly boost their share prices.
Take Force Protection (FRPT: NASDAQ), for example. This is a company that’s familiar to Penny Sleuth and SCSR readers, as we’ve wrestled with the timing of recommending this top-notch military ground vehicle manufacturer. We had trouble justifying its stock price around the $10-$11 range at the end of last year…and it made a straight march past $24. It retreated back to the mid-teens only to climb right back up to $23:
Just this week, Force was awarded a $481 million contract to produce Mine Resistant Ambush Protected (MRAP) vehicles for the Navy. This contract is substantial for a company that had sales of about $49.7 million for all of 2005. And this contract is more than twice the size of Force’s record 2006 sales. Credit this contract win to an unbelievable combat record for these vehicles in the Middle East. According to our information, U.S. troops using these vehicles have yet to suffer a single casualty while aboard them. There always seems to be a healthy market for the best of anything…
Early this week, we wrote about other sources that will likely drive U.S. defense spending, even if an Iraq pullout were imminent. We looked at Taiwan, and their almost total lack of home defense spending. It is thought that should any attacks come from, say, China, the U.S. would defend the Far East democracy out of its own pocket.
As you can see, we’re still bullish on defense, and we’ve got some great recommendations in both Small-Cap Strategy Report and Small-Cap Insider. For those of you holding small-cap defense investments, if they are pushing record valuations, I would pare down to only those that are favored as the best in their respective niches. The second tier players will likely be more sensitive to any sort of market sell off.
Until next time,
Craig
April 26, 2007
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