The US Defence Department’s plan to send 30 000 additional troops into Afghanistan is likely to prove a boon to Defence contractors that gather and monitor intelligence and provide essential logistics services.
Yesterday, the Pentagon announced the deployment of the first 16 000 troops set to go into Afghanistan.
Companies that provide products that keep soldiers safe and help them communicate securely will especially see strong demand, analysts said.
“The big winners that we see are L-3 Communications, FLIR Systems and Raytheon,” Morgan Keegan analyst Brian Ruttenbur said.
Defence stocks have notched strong gains since US President Barack Obama detailed the planned troop increase. The S&P Aerospace & Defence index has risen 3.9% in the past week, aided by a 6% climb in shares of L-3. Industry leader Lockheed Martin is up 1.9% on the week, and General Dynamics, a key supplier of tanks and ammunition, gained 3%.
“Defence spending is not going to go down as quickly as people thought and that’s sort of a rising-tide-lifts-all-boats situation,” said Alexander Hamilton, a Defence analyst with Jesup & Lamont Securities.
The White House Office of Management and Budget has approved an almost $60 billion increase to the Pentagon’s base budget for the next five years, according to a published report from online news service InsideDefense.com.
The increase includes a $15 billion top line rise for fiscal 2011, plus $11 billion annually between the 2012 and 2015 budget years, InsideDefense.com said.
The spending outlined in the report “should reduce investor concerns about potential significant decreases in Defence spending going forward,” Morgan Keegan’s Ruttenbur said.
Increased demand for systems that gather, monitor and disseminate intelligence should pay dividends for L-3, Raytheon and FLIR, while General Dynamics should see rising demand for its combat products, Ruttenbur said.
American Science & Engineering Inc makes a mobile detection system that could be widely used in Afghanistan, since it provides photo-like X-ray images of explosives and plastic weapons, Ruttenbur added.
L-3 said intelligence systems have been its fastest-growing segment in 2009. It also said it wanted to acquire companies with “must-have” technologies.
“In terms of Defence, we are looking at adding or augmenting what we have with additional technologies and capabilities,” L-3 CEO Michael Strianese told a December 2 investor conference.
Oshkosh Corp, which is expected to win orders for thousands more of its mine-resistant, ambush-protected (MRAP) all-terrain vehicles, expects to be “solidly profitable” during its 2010 fiscal year, its chief executive said last week. Oshkosh is already due to build more than 6200 MRAPs.
Hamilton, the Jesup & Lamont analyst, likes prospects for suppliers of unmanned aerial vehicles as well as ManTech International Corp, which provides mine detection and mine retrieval systems.
Service providers will also see gains. DynCorp International Inc, which provides police training as well as dining and other logistics services, said last week it expects more business from rising troop levels in Afghanistan.
“If you think of the types of operations that will be conducted on the ground, the folks that provide contracting support for US personnel will benefit most directly and most immediately,” said Dakota Wood, a senior fellow at the private Centre for Strategic and Budgetary Assessments.
Should a US troop withdrawal begin in mid-2011, there will still be business for US companies as Afghan natives assume more responsibility for security.
Alliant Techsystems said last week it expects strong demand for its ammunition and protective vests after US troops leave Afghanistan.
Homeland Security Research Corp, a marketing analysis firm, concludes in a report due to be released on December 9 that an Afghan “train and equip” program will present US businesses with over $37 billion of opportunities over the next few years, because of demand for everything from bullets and blankets to robots and secure-networking technologies.