美国航空航天与国防展望

1、Credit Suisse Equity ResearchAmericas/United StatesAerospace & Defense2019 Defense OutlookFor Whom the Bell Tolls RevisitedDefense Now Looks More DefensiveJanuary 14,2019Robert Spingarn+1.212.538.1895 HYPERLINK mailto:robert.spingarn robert.spingarncredit HYPERLINK mailto:robert.spingarn - HYPERLINK

2、 mailto:robert.spingarn Joe Caiado+1.212.325.6771 HYPERLINK mailto:jose.caiado jose HYPERLINK mailto:jose.caiado .caiadocredit HYPERLINK mailto:jose.caiado - HYPERLINK mailto:jose.caiado Audrey Preston+1.212.325.2709 HYPERLINK mailto:audrey.preston audrey HYPERLINK mailto:audrey.preston .prestoncred

3、it HYPERLINK mailto:audrey.preston - HYPERLINK mailto:audrey.preston Scott Deuschle+1.212.325.6116 HYPERLINK mailto:scott.deuschle scott.deuschle HYPERLINK mailto:scott.deuschle credit HYPERLINK mailto:scott.deuschle - HYPERLINK mailto:scott.deuschle DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CO

4、NTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-USANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict ofintere

5、st that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. OverviewSectorPerformanceExecutiveSummaryDefense & Federal IT 2019OutlookBuyside SurveyResultsCompanySnapshots Overview2007-2018 Sector Perform Over

6、viewDefensemateriallyunderperformedin2018;GovernmentServices,CommercialAerorelative outperformers.After6yearsofrelativeoutperformance,DefenseremarkablyunderperformedtheS&Pin2018,tradingdown18%fortheyear,vs a7%declinefortheS&P.Inourview,theweaknessindefensewasdrivenbyexcessivevaluations,anappreciatio

7、nforlestrobust future budget growth, likely margin stagnation for some names in the group, and greater concern for political risk. Government services staged a comeback, however, trading up 3% for the year, driven by positive earnings surprises as well as a more attractive starting point for valuati

8、ons. AbsolutePerformanceofSectorbyEndMarket,RebasedatBeginningofEachYear60%40%20%0%-20%-40%-37%-7%-29%-6%-6%-18%-0%-6%-14%-11%Aero-10%-5%-60%DefenseGovtServicesCommercialOEMsCommercialDefenseGovtServicesCommercialOEMsCommercialSuppliersSource: Factset; CS Research OverviewExecutive Summary: Our Over

9、viewDefense now looks more defensiveOuroutlookonthedefensespaceremainsgenerallyNeutral,butselectivelybullish.Valuationsaremuchmoresupportive here,nearingthemidpointbetweenpeakandtrough,andEPSandFCFshouldcontinuetogrownicelyoverthenext2-3 years as strong funding in the 2018/2019 defense appropriation

10、s bills makes its way to the bottom line. the trajectoryofthe2020(andbeyond)budgetsisanythingbutparticularlyaftertheresignationofSecretaryofDefense Mattis, and we expect multiples (and hence share prices) to hinge heavily on this Our baseline budget expectationforthenextseveralyearsisforagenerallyfl

11、attomodestlyupBASEdefensebudget,withapotentialOCO declineduetotherecentlyannouncedforeignwardrawdowns(withsomemodestlynegativeimpacttocontractors).believethatthisexpectationforBASEandOCOfundingsupportsex-pensionmultiplesnearcurrentlevels(14xon2020). aflat/low-growthBASEbudgetoutcomeisanythingbutguar

12、anteed,anddownsideremains,particularlywithout formerSecDefMattistohelpguidefuturedefensebudgetsthroughanewlydividedCongress.remainselectivelybullish,asvaluationsandtheoverallthreatenvironmentappearbroadlyprotectiveagainst significant downside, while a number of our names have strong micro stories to

13、 tell. HRS/LLL stands out here, particularlyheadinginto2H19(postdealclose),whenthenewcompanywillbeabletoproveoutitssynergystory(cost, capitalrevenue)whilealsoaggressivelyreturningcashtoshareholders.NOC(upgradedtofrom Nwith thisoutlook)alsolookstobeanattractivelonger-termplay,withsolidstrategicpositi

14、oningvis-vistheNational Security Strategy, good visibility and longer-term growth prospects, longer-term margin upside (due to program maturation), a return to shareholder-friendly capital deployment, and potential upside from the OA integration as NOC enters newly addressable adjacencies (e.g. miss

15、iles/missile defense,space).Overall, we now prefer defense hardware to Federal IT (reversing our previous view), as valuations are generally comparable and defense hardware offers superior medium-term visibility.Defense & Federal ITRiskDefense & Federal ITRiskandrewardtiltingbackintobalance.OverallN

16、eutral. Selectively bullish.Top Picks: HRS/ Upgrades: (to fromN)5 DefenseDefense Hardware Ratings, Target Prices, and Defenseand HRS/are our top picks heading into 2019CompanyRatingUpside / PotentialCons. GAAP Market CapP/E(2020)($inM)CS ViewL3 Technologies (LLL)Harris Technologies (HRS)OPOP32.2%30.

17、5%13.3 $ 13,630 Strongest micro story in Defense. The merger between HRS and LLL promises synergies cost, revenues, and working The companies screen cheap on the $3B year 3 FCF target, which we do not believe mark peak, unless there a deterioration the budget.Inthemeantime,apost-closereturntoshareho

18、lder-friendlydeployment(withemphasisonthebuyback) shouldcreate supportand15.1 $15,871 upward momentum shares heading into 2H19.Northrop Grumman (NOC)OP (from N)17.2%Value, growth, capital allocation, integration upside. NOC remains in tight alignment with the National Security Strategy, a position w

19、hich we believe shields large portions of its portfolio from potential future budget pressures. Layering in potential revenue synergy from the OA acquisition and a11.7 $ 44,735 return to shareholder-focused returns, we believe that NOC now attractive blend of value, growth, and relative downsideprot

20、ection.ourTPdeclinesmodestlywerecalibrateourvaluationtoapoint-estimateon2020,therecentbatteringofsharesleaves us with 20% upside, supporting our upgrade. NOC our top pick Defense, alongside HRS/LLL.Huntington Ingalls (HII)OP22.1%Value with downside protection. HII screens the cheapest on FCF within

21、our coverage universe, while offering the greatest budget downside12.0 $8,270 protection due to its exposure to long-cycle and inherently less-cyclical shipbuilding budgets. An early or on-time delivery of fixed-price and high-risk CVN 79 (currently slated Q4) to be a key catalyst the stock.General

22、Dynamics (GD)OP17.0%Inexpensive, but with some cycle risk. GD screens cheap on PE and FCF, and has a solid longer-term growth story to tell, primarily through its12.1 $48,104 marine segment which has secured the prime position on the $100B+ Columbia Class program (w/ 80% content). However worries re

23、garding the companys segment could constrain multiples until visiblity improves.Lockheed Martin (LMT)N7.0%Comparatively expensive ex-pension. LMT remains one of the highest quality names our coverage, with some of the most dominant franchises the business. However, the dominance of temporary pension

24、 both the income statement and FCF gives us pause, with the stock trading somewhat expensively on ex-pension basis (12% premium to peers). This LMT to grow FCF 2021 (in11.2 $ 78,928 comparison to most other names which should be growing FCF through that timeframe), when more material ERISA contribut

25、ions are set to resume. Recent management comments suggest a $1.3-1.8B Y/Y step-up ERISA contributions from 2020 to 2021 (from $200M to $1.5-$2B). CAS should continue to exceed this level, but the relative headwind represents a challenge. Management has stated that W/C growth seen across 2018- 2020

26、should begin to reverse 2021, which could offset, but we nevertheless see some challengesahead.Raytheon (RTN)N8.4%Solid franchises and reasonable ex-pension valuation, more fast cycle than strategic. RTN has not secured any new platform wins11.7 $45,413 some time (e.g. hypersonics), which suggests a

27、 potentially more modest growth story after the current readiness-driven wave of defense spending dissipates. Margins, meanwhile, appear to have only upside from here. RTNs multiple driven by hot-war rhetoric (e.g. N. Koreatension), which appear to be easing.BWX Technologies (BWXT)N5.8%Dominant fran

28、chise in naval nuclear power, but remains expensive on FCF. FCF looks to remain constrained as the company continues to15.0 $4,011 spend on developing its medical isotope technology, the promise of which remains to gauge. Meanwhile, tube welding rework and EPS growth.Source: Factset, CS Research Def

29、enseFederal IT Defenseand HRS/are our top picks heading into 2019CompanyRatingUpside/PotentialGAAPP/EMarketCap(2020)($inM)CS Booz Allen HamiltonOP22.4%14.1 $Strong organic growth margin expansion, downside protection classified exposure. Good exposure to modernization through best capabilities in ar

30、eas as cybersecurity machine learning.LeidosOP31.1%Deep value, though growth lagging. A sustained return to growth will be the key test for LDOS in 2019. If it achieves10.5 $this goal, investors can look for a re-rating towards peers, could trigger a solid rally for the name. Even without significan

31、t top-line growth, the return to the buyback (after its multi-year deleveraging process) enable solidEPS growth solely on share count reduction.CACIN13.1%M&A model still in focus. CACI comes in middle of the pack in terms of growth, margin expansion, valuation. It is13.9 $likely to continue its of M

32、&A targets, if materially accretive could add upward revisions to out-year EPS estimates.However,thevaluationimproved,weremainneutralherewithoutcleardownsideprotectionfromabudget slowdown.MantechUP-11%MANT continues to trade at a significant premium to peers in the space. We believe it will soon fac

33、e difficult comps owing21.8 $to the lapping of a major acquisition made (InfoZen). War exposure could have an impact here if the Syria/Afghanistan withdrawals are completed to a significant degree this year. Risks to our underperform rating include thepossibility that MANT is a take-out target for o

34、ne of the larger Fed IT names.and the associated reduction in EBITDA brings covenant concerns back to the fore. Meanwhile, the challenged GEO business continues to drag on cash and EBITDA while sale negotiations are ongoing.368 and the associated reduction in EBITDA brings covenant concerns back to

35、the fore. Meanwhile, the challenged GEO business continues to drag on cash and EBITDA while sale negotiations are ongoing.368 malfunction of its WorldView 4 satellite. The loss of this satellite reduces the growth outlook in its core Imagery segment,1.8 $-5%UPMaxar TechnologiesDespite recent steps t

36、o reduce risk and improve visibility, Maxar is once again in a precarious position following the recentSource: Factset, CS Research Defense2018 Sector Performance DefenseLets not do that again What Said2018 Outlook: 2018 Outlook: Our 2018 outlook (published Jan 2018) offered a “moderately bullish” v

37、iew on defense, with a preference for Fed IT. HYPERLINK /r/V7cYxe2AN-Ytkb Fo HYPERLINK /r/V7cYxe2AN-Ytkb r HYPERLINK /r/V7cYxe2AN-Ytkb Who HYPERLINK /r/V7cYxe2AN-Ytkb m HYPERLINK /r/V7cYxe2AN-Ytkb th HYPERLINK /r/V7cYxe2AN-Ytkb e HYPERLINK /r/V7cYxe2AN-Ytkb Bel HYPERLINK /r/V7cYxe2AN-Ytkb l HYPERLIN

38、K /r/V7cYxe2AN-Ytkb Tolls:WerefreshedourDefenseoutlookinourMay22valuationdeepdive,“ForWhomthe Bell Tolls.” We downgraded the group and presented a more bearish thesis in the context of overly-rich ex- pension valuations, likely margin stagnation, political “midterm election” risk, declining budget g

39、rowth (withdownside beginning in 2020), eventual pension normalization, and rising interest rates. What YouSaidMixedMixedview:Buysidesentimenttowarddefensewasmixedheadinginto2018,with19%ofrespondentsnamingittheirpreferredoverweightwithinindustrials,while22%selecteditastheirpreferredunderweightinIndu

40、strials. What Happenedunderperforming the S&P 500 by 11%. Government Services meanwhile struck a dramatic outperformance,underperforming the S&P 500 by 11%. Government Services meanwhile struck a dramatic outperformance,posting a gain of 3.2% for the year.Defense hardware traded down 18% on average

41、through 12/31/18,2018 BroketheWinStreak: Defense2018/ 2019 Budgets in DefenseLets do that againThe2018defenseappropriationsbillsofferedthestrongestpeacetimedefensespendinggrowthsince the Reagan buildup in the 1980s. From 2017 to 2018, the investment accounts (procurement + RDT&E)grewby20%(+$39.4B),w

42、iththe2019appropriationsbillofferingatop-offoflow-singledigit growthforprocurementandmid-singledigitgrowthinRDT&E.Due to the lag between budget authority and outlays, DoD outlays will take some time to catchupwiththe DoD topline, leading to several years of mid-single digit+ outlay growth. This shou

43、ld translate into3+ years of continuous revenue growth for the defense primes, even if budgets stagnate going forward. Investment Account Budget Authority, 2019 Constant Dollars ($B) 35030025020015010050ProcurementRDT&ESource:DepartmentofDefense DefenseDevelopinga 2020+ Budget Expectation: Defensese

44、e the threat environment being the strongest of support domestic defense spending. StrategicChinaheatedup during 2018, a on through both the economic (trade), strategic (arrests of actions undertaken by both nations. History of potential Thucydides trap, point to the continuation the current race. R

45、ussia re-emerged adversary strategic competitor to the U.S., further up the threat environment. An of tensions North Korea some to these trends, though we do not believe that N. Korea see the threat environment being the strongest of support domestic defense spending. StrategicChinaheatedup during 2

46、018, a on through both the economic (trade), strategic (arrests of actions undertaken by both nations. History of potential Thucydides trap, point to the continuation the current race. Russia re-emerged adversary strategic competitor to the U.S., further up the threat environment. An of tensions Nor

47、th Korea some to these trends, though we do not believe that N. Korea ever been a driver of domestic defense spend, outside of theMissile Defense Agency.expect the Base budget trajectory to be to modestly positive over the years, President Trumps announced Afghanistan/Iraq contributingtooverall DoD

48、Downside risk modestly asymmetric, dysfunction the potential that the new Congresspursue austerity the economy experiences recession being the greatest The threat environment should help most of this risk, however.The governments presents the risk to medium- term domestic defense spending trends, ou

49、r view. The CBO projects the reach $980B 2019, exceeding $1T year of its thereafter. note that the CBOs contemplates furthereconomicgrowth,supportinga continued rise tax receipts. this not occur, the receipts trigger a the toward 7% of GDP, on our math. Unless the government to a debt burden (such J

50、apan, 200%+ of GDP), or entitlement programs,thendiscretionaryspending defense) be to the axe such a note such austerity be common economicenvironments.The recent debate government shutdown over the border the of uncertainty that exists around the domestic environment. broadly, we think the current

51、support another (modest) growth year the domestic BASE defense budget, the House Pelosi seeks to provide to those thatsupportedherspeakershipbid. However, the loss of Secretary Mattis the of this our view. Additionally,investorattentionsoon to the 2020 Presidential election, the prospect that unseat

52、 President that so been supportive of defensespending.Threat PoliticsFiscalCapacityCS DefenseTwo Patterns Worth Keeping in MindPattern 1) In “The Rise and Fall of the Great Powers”, Yale historian Paul Kennedy offers a survey of 500 yearsofrelativechangeingeopoliticalpositioning.Ofthemanyhistoricalp

53、atternsdiscussedinthebook,oneis especiallyrelevanttotodaysdefenseinvestor:thatglobalhegemons,whenfacedwiththeirrelativeeconomic decline vis-vis rising competitors, have shown a historical pattern of increasing defense spending as they experience their relative decline.“For“Forithasbeenacommondilemma

54、facingprevious“number-one”countriesthatevenastheirrelativeeconomic strengthisebbing,thegrowingforeignchallengerstotheirpositionhavecompelledthemtoallocatemoreandmore oftheirresourcesintothemilitarysector,whichinturnsqueezesoutproductiveinvestmentand,overtime,leadsto thedownwardspiralofslowergrowth,h

55、eaviertaxes,deepeningdomesticsplitsoverspendingpriorities,anda weakeningcapacitytobeartheburdensofdefense.”PaulKennedy,TheRiseandFalloftheGreatPowersPattern 2)Perhapsanextensionofthefirstpattern,asecondtrendseenthroughhistoryisthetendencyof incumbent powers to go to war with rising powers. This phen

56、omena is called a “Thucydides Trap”, a phenomenacoinedbythepoliticalscientistGrahamAllison.Inthequotebelow,substituteChinaforAthensand theUnitedStatesforSparta,andapotentialexplanationofthecurrentcircumstancesemerges.“It“ItwastheriseofAthensandthefearthatthisinstilledinSpartathatmadewarinevitable.”T

57、hucydidesSource: CS Research, OSD Budget Materials DefenseThreat Environment: China, China, China DefenseSenior US planners are increasingly focused on rivalry with China, and, to a lesser extent, Russia“The central challenge to U.S. prosperity and security is the reemergence of long-term, strategic

58、 competitionbywhattheNationalSecurityStrategyclassifiesasrevisionistpowers.Itisincreasinglyclear thatChinaandRussiawanttoshapeaworldconsistentwiththeirauthoritarianmodelgainingveto authorityoverothernationseconomic,diplomatic,andsecuritydecisions.Chinaisleveragingmilitarymodernization,influenceopera

59、tions,andpredatoryeconomicstocoerce neighboring countries to reorder the Indo-Pacific region to their advantage. As China continues its economicandmilitaryascendance,assertingpowerthroughanall-of-nationlong-termitwill continuetopursueamilitarymodernizationprogramthatseeksIndo-Pacificregionalhegemony

60、inthe anddisplacementoftheUnitedStatestoachieveglobalpreeminenceinthefuture.Long-termstrategiccompetitionswithChinaandRussiaaretheprincipalprioritiesfortheDepartment, andrequirebothincreasedandsustainedinvestment,becauseofthemagnitudeofthethreatstheypose toU.S.securityandprosperityandthepotentialfor