The Next Defense Contractor to Go “Into Play”

Keith Fitz-Gerald Jun 12, 2019


It’s a key part of the Total Wealth Strategy and a fundamental element in one of the Six Unstoppable Trends we follow: War, Terrorism and Ugliness.

A growth trend, really.

Sadly, most investors are missing out, but not for reasons you might think.

Today, I want to talk about that for a moment and give you a head start that could be one of the most profitable trades you make in the next 12 months.

Here’s which defense contractor to buy ahead of the next merger.

Let’s start with the Raytheon Co. (NYSE:RTN) and United Technologies Corp. (NYSE:UTX) tie-up.

The deal, which is being billed as a “merger of equals” broke Sunday with the announcement of an all-stock deal worth something on the order of $166 billion, according to CNN. Combined sales will be between $74 – $75 billion according to my back of the envelope calculations which means the “multiple” is about 1.80X revenue coming into Monday’s trading.

Ownership will be split roughly 57%/43% between existing United Technologies shareholders and Raytheon shareholders – pending an anticipated closure in mid-2020. The deal’s already been approved by both boards, so I expect things to go at a more rapid clip than a deal of this size would otherwise.

The merger creates a monster defense contractor that’s second only to Boeing and the $101 billion in revenue it produces. But it’s the breadth that matters here and which catches my attention.

As I mentioned during a Monday morning appearance on the Fox Business Network, defense isn’t about distinctness any longer. It’s about “plug and play” – a more modular approach to development usually taken and thought about with tech companies.

If you’ve ever operated in a mission critical environment like I have, you’ll recognize what I am about to say immediately. If not, here’s what you need to know.

Weapons systems are not developed in isolation…everything works with something else.

You don’t just, for example, develop an instrument for an airplane and stuff it in the dash panel. The sensors it uses and the information it provides may have to produce, deliver, and receive information from 100 or more different related systems and subsystems related to missile delivery, aircraft function, overwatch, and more.

The Raytheon/United deal is particularly appealing because it will allow still further, more effective, more lethal integration of increasingly data-dependent systems needed in today’s threat environment.

Speaking of which, this concept is at the heart of something called the reconfigurable integrated-weapons platform (RIwP- for short).

It’s made by Italian based Leonardo S.p.A (OTC:FINMF).

The company is already an established defense contractor with key product offerings in global satellite communications and networking. That stuff, in turn, plays a key role in products like the MFoCS, a mounted family of mobile computer systems deployed in combat vehicles operating in conjunction with tactical sensors, logistics, and combat control.

The RIwP is a great example because it creates a flexible, scalable weapons system combining maximum crew survivability and lethality yet requires minimal training time. Critically, it also provides a “see first, shoot first” capability which means our warfighters can hit the enemy before they even know we’re here if they have to.

The RIwP includes dual-axis, long-range independently sighted weapons for on the move targeting while also allowing advanced fire control, kinetic weapon protection (a growing battlefield problem), and even the ability to rapidly reconfigure to meet emerging, full-spectrum threats.

I realize this is a lot like defense-related buzzword bingo, so here’s quick company-provided video that’ll help you understand and see it in action.

Existing clients include the U.S. Army, Canadian Armed Forces, Peruvian Air Force, Brazilian Navy, Polish Ministry of Defense; corporate clients such as Petrobras and Weststar Aviation; and high volume airports in cities around the world, including Hong Kong, Paris, Rome, Zurich, Lyon, Kuwait City, and Greece, to name a few.

Notable recent contract wins include a $977 million whopper to provide USSOCOM with SATCOM (translation – the United States Special Warfare Command with Satellite Communications) and contracts for “ruggedized next-generation maintenance” and testing systems (translation – battlefield hardened hi-tech gear that’ll make your protective phone case look like amateur hour).

You can buy shares directly on the Milan stock exchange if you’d like where the ticker is LDO.MI. Or, right here at home in the over-the-counter market using Leonardo SpA (OTCMKTS:FINMF) where they’re trading around $11.10 as I type.

CEO Bill Lynn III knows exactly what he’s doing and I have to imagine other growth-hungry CEOs do, too.

Until next time,


2 Responses to The Next Defense Contractor to Go “Into Play”

  1. Robert Ross Hillier says:

    Keith, I was impressed by your Arbitrage Strategy. Is it going well?

  2. Charlie DiDonato says:

    Keith, thank you much for your continued solid research and recommendations! My biggest concern when it comes to Amazon, Apple and Google is the potential for our own State and Federal Governments penalizing these companies for their successes. With that in mind, I have been buying Microsoft shares and selling partial positions in the other three. Microsoft went through a ten year battle with the government and appears to be in the clear. And with a great CEO leading the company now, looks to me to be the safest play in big tech right now. What are your thoughts and why haven’t you recommended them for our portfolio?


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