LMT - Debt-ceiling deal is positive for defense stocks: Citi

2023-05-30 09:44:32 ET

President Biden and House Speaker Kevin McCarthy’s deal to suspend the debt ceiling should be positive for the stocks of defense contractors, analysts at Citibank said in a report on Tuesday. The agreement allows the nation’s defense spending to rise by at least 3% for fiscal 2024 amid global tensions including the war in Ukraine and threats to Taiwan’s independence from China.

“This outcome demonstrates that the primary driver of defense spending continues to be the perceived threat environment – with both the White House and Congressional Republicans acknowledging the need to spend more given the geopolitical backdrop,” Jason Gursky, analyst at Citi, said in the report. “We expect defense stocks to react positively to the news and Congressional approval of the deal in the coming days.”

Citi has Buy ratings on defense contractors General Dynamics ( NYSE: GD ), Leidos Holdings ( NYSE: LDOS ), Lockheed-Martin ( NYSE: LMT ) and Science Applications International ( NYSE: SAIC ). The companies are poised to benefit from increased spending on armaments by the U.S. Department of Defense.

The debt-ceiling deal “is likely to drive 4% growth in the weapons accounts as the department focuses on investing in the tools of deterrence,” according to Citi. “The deal then allows for 1% base budget growth in fiscal year 2025, a level we expect to be increased by supplemental spending bills outside the caps in order to support Ukraine and to address DoD’s unfunded priorities.”

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