Budgets, presidents and the defense industry: What to watch in 2024

Most U.S. stocks where defense is a factor have underperformed in the S&P 500 in 2023. There have been some expectations, notably AeroVironment, Booz Allen Hamilton, and Kratos Defense and Security Solutions. In addition, most defense stocks in Europe, the Middle East and Asia have done far better than U.S. ones.

It’s too soon to say whether this pattern can or will change in 2024, but it’s worth reviewing some of the factors which will bear on U.S. defense sentiment in 2024.

Having written this while the U.S. was under a continuing resolution, the first factor will be the outcome of fiscal 2024 appropriations. The first factor will be the outcome of fiscal 2024 appropriations . There remains a wide cone of uncertainty over what Congress will get done. The most positive outcome for defense would be the enactment of FY24 appropriations at or above the administration’s request, plus the supplemental request of $106 billion .

The most negative could be a fraction of the supplemental request and continuing resolutions that last into May 2024 without changes to the Fiscal Responsibility Act of 2023. That act resets the FY24 budget to 99% of the levels appropriated in FY23 (that’s base budget only, not emergency spending).

The eventual outcome may be somewhere between the best and worst cases.

The FY24 appropriations outcome will bear on long-term sales growth expectations. Per Bloomberg, estimates of consensus sales show mid-single rates of annual growth in 2025-2026 for larger U.S. contractors, and higher rates for smaller ones. Procurement as well as research, development, test and evaluation outlays — which mostly result from FY23 and prior fiscal year appropriations — show a peak growth rate of 15% in 2024. There is not a high correlation between percentage rates of change in outlays and Defense Department-related sales, but the two move in similar directions. The outlay data is supportive of consensus sales estimates.

But beyond 2024, it may be a different story. Investment outlays show 5% growth in 2025 and 0% in 2026, with those estimates reflecting the FY24 request but not a supplemental. Stocks tend to move up when analysts increase estimates, and down when the opposite happens, which is why Congress and FY24 is so important.

There are bound to be sell-side analyst reports that trot out data showing U.S. defense stocks tend to do well in presidential election years. However, the 2024 election might be different, or at least reinforce some of the factors that have weighed on U.S. defense in 2023.

If former President Donald Trump wins the election, it could significantly alter expectations for U.S. commitments to alliances such as NATO and for support of Ukraine . Those changes could be positive for European defense in 2025 and beyond, but could entail changes to U.S. export prospects and possibly DoD top line expectations.

If President Joe Biden is reelected, there is still the possibility of split-party control of the House and Senate — and with it, the partisan entrenchment that has weighed on budgets in 2023.

Operating margins and cash flows are other factors that shape stock behavior. Arguably, operating performance has been pretty good in 2023 given the pressures industry has faced from supply networks and labor. And while there have been pockets of execution issues, these have not been sweeping. Possibly these factors remain the same in 2024, but an issue will be the health of much smaller suppliers that are highly exposed to material inflation, labor issues and higher interest rates. Prime contractors might be able to manage these issues, but surprises are still possible.

Mergers and acquisitions may be limited to movement in small and midsize companies and continued portfolio shaping at larger firms. A change in the administration’s views that would encourage more consolidation among the largest firms seems highly unlikely given concerns over loss of competition, innovation and market power.

A final factor to watch in 2024 is how the competitive landscape changes and whether smaller defense technology firms can win programs enabling them to scale. If that happens, growth expectations could be recalibrated as these private firms either go public or appreciation of their market potential is confirmed. If it doesn’t happen, and funding sources dry up for defense technology, the competitive environment might be more benign.

Byron Callan is a managing partner of the research firm Capital Alpha Partners.

2023年，大多数涉及国防业务的美国股票在标普500指数中表现逊于大盘。不过，市场也曾对部分公司抱有期待，例如AeroVironment、博思艾伦咨询公司（Booz Allen Hamilton）和克拉托斯国防与安全解决方案公司（Kratos Defense and Security Solutions）。此外，欧洲、中东和亚洲的大多数国防类股票表现远超美国同类股票。

现在断言这种模式在 2024 年是否能够或将会改变还为时过早，但值得回顾一下一些将影响 2024 年美国国防情绪的因素。

撰写本文时，美国正处于持续拨款决议的框架下，因此首要因素将是2024财年拨款的结果。目前，国会最终能通过哪些法案仍存在很大的不确定性。对国防而言，最有利的结果是2024财年拨款达到或超过政府的申请额，再加上1060亿美元的补充申请。

最糟糕的情况可能是，如果不修改 2023 年《财政责任法案》，那么到 2024 年 5 月，补充拨款申请和持续决议的拨款额度将只有一小部分。该法案将 2024 财年预算重置为 2023 财年拨款水平的 99%（这只是基本预算，不包括紧急支出）。

最终结果可能介于最好和最坏的情况之间。

2024财年的拨款结果将影响长期销售增长预期。据彭博社报道，市场普遍预期，2025-2026年美国大型承包商的年增长率将处于中等水平，而小型承包商的增长率则更高。采购以及研发、测试和评估支出（主要来自2023财年及之前财年的拨款）的峰值增长率预计将在2024年达到15%。支出变化百分比与国防部相关销售额之间相关性不高，但两者走势相似。支出数据支持市场普遍预期。

但2024年之后，情况可能就不同了。投资支出预计2025年增长5%，2026年增长0%，这些预测反映的是2024财年的预算申请，而非补充申请。分析师上调预期时，股市往往会上涨；反之，则往往下跌。这就是为什么国会和2024财年如此重要的原因。

肯定会有卖方分析师的报告援引数据，指出美国国防股在总统选举年往往表现良好。然而，2024年的选举情况可能有所不同，或者至少会加剧2023年对美国国防股造成压力的某些因素。

如果前总统唐纳德·特朗普赢得大选，可能会显著改变人们对美国对北约等联盟的承诺以及对乌克兰的支持的预期。这些变化可能对2025年及以后的欧洲防务有利，但可能导致美国出口前景以及国防部预算预期发生变化。

如果乔·拜登总统连任，众议院和参议院仍有可能出现两党分治的情况——随之而来的是，党派僵化问题将对 2023 年的预算造成影响。

营业利润率和现金流是影响股价走势的其他因素。考虑到行业在供应链和劳动力方面面临的压力，2023年的经营业绩可以说相当不错。虽然执行方面存在一些问题，但并不普遍。这些因素在2024年可能依然存在，但一个值得关注的问题是规模较小的供应商的经营状况，它们极易受到材料通胀、劳动力问题和利率上升的影响。主要承包商或许能够应对这些问题，但仍有可能出现意外情况。

并购活动可能仅限于中小企业的重组以及大型企业的持续投资组合调整。鉴于人们担忧竞争、创新和市场力量的丧失，政府改变立场鼓励大型企业进行更多整合的可能性极低。

2024年需要关注的最后一个因素是竞争格局的变化，以及规模较小的国防科技公司能否赢得项目，从而实现规模化发展。如果这种情况发生，随着这些私营公司上市或其市场潜力得到认可，增长预期可能会重新调整。如果这种情况没有发生，国防科技领域的资金来源枯竭，竞争环境可能会更加温和。

拜伦·卡兰是研究公司 Capital Alpha Partners 的管理合伙人。