Sector Spotlight: U.S. budget to include DoD spending above expectations

Welcome to the latest edition of “Sector Spotlight,” where The Fly looks at a new industry every week and highlights its happenings.

DEFENSE SECTOR NEWS: Hours after Defense Secretary Pete Hegseth and senior Army officials revealed a sweeping reorganization that will merge Army Futures Command with Training and Doctrine Command and end production of the M10 Booker light tank, a two-star Army general has informed staff that the service plans to stop work on the troubled Robotic Combat Vehicle program and pause its new howitzer competition, Ashley Roque of Breaking Defense reported. The publication noted that industry sources had been informed of Textron Systems’ (TXT) Ripsaw 3 winning the RCV competition, with the Army preparing to finalize a contract with the selected vendor, but around the same time, Army leadership flagged the RCV program for cancellation as part of an 8% budget realignment aimed at shifting funds toward higher-priority efforts.

President Donald Trump’s proposed budget for next year calls for a decrease to NASA’s budget by more than $6B, Sana Pashankar and Loren Grush of Bloomberg wrote. The White House calls on NASA to phase out the “grossly expensive and delayed” Boeing-built (BA) Space Launch System rocket and Lockheed Martin (LMT) Orion crew capsule after just three flights.

RTX (RTX) announced that its board declared a dividend of 68c per outstanding share of RTX common stock, which represents an increase of 7.9% over the prior quarter’s dividend amount. The dividend will be payable on June 12 to shareowners of record at the close of business on May 23.

RTX and Nightwing Group have agreed to pay $8.4M to resolve allegations that Raytheon violated the False Claims Act by failing to comply with cybersecurity requirements in contracts or subcontracts involving the Department of Defense, the DOJ announced. Raytheon is a subsidiary of RTX. In March 2024, RTX sold its Cybersecurity, Intelligence, and Services business, which since became part of Dulles, Virginia-based Nightwing. The settlement resolves conduct that allegedly occurred between 2015 and 2021, prior to Nightwing’s acquisition of the business.

The U.S. Army is embarking on its largest overhaul since the end of the Cold War, with plans to equip each of its combat divisions with approximately 1,000 drones, Michael Gordon of The Wall Street Journal reported. The plan heavily draws on lessons from the war in Ukraine, where small, unmanned aircraft were used in large numbers.

General Dynamics (GD) and Huntington Ingalls (HII) were awarded contract modifications for construction of two FY24 Virginia-class submarines, investments to improve productivity at the shipyards, and for nuclear-powered vessel programs workforce support and investment. General Dynamics is being awarded $12.42B, and if all options are exercised the total value will be $17.15B; and Huntington Ingalls is being awarded $1.29B. These contracts include options which, if exercised, would bring the cumulative value of the contract change to $18.45B. Work is expected to be completed by June 2036. FY24 shipbuilding and conversion funding in the amount of $5.26B and FY25 shipbuilding and conversion funding in the amount of $4.16B will be obligated at time of award and will not expire at the end of the current fiscal year. Naval Sea Systems Command is the contracting activity.

Lockheed Martin (LMT) and Rheinmetall (RNMBY) have agreed to expand their existing cooperation. An extension of an already existing MOU from June 2024 has been signed between both partners. Building on their existing partnership, the companies intend to extend the scope of collaboration in order to serve as a European center of excellence for the manufacturing and distribution of various rockets and missiles to enhance the security and self-reliance of Europe. The center of excellence, based in Germany, will be led by Rheinmetall and will primarily operate in Germany and other European countries.

General Dynamics was awarded a $727.8M firm-fixed-price contract to procure 120 mm Insensitive Munition High Explosive with Tracer tank ammunition cartridges. Bids were solicited via the internet with one received. Work locations and funding will be determined with each order, with an estimated completion date of April 26, 2030. U.S. Army Corps of Engineers is the contracting activity.

Riyadh Air would be ready to buy Boeing aircraft destined for Chinese airlines if they are not delivered due to the escalating trade war between the U.S. and China, Reuters’ Hadeel Al Sayegh and Manya Saini wrote. “What we’ve done… is made it quite clear to Boeing, should that ever happen, and the keyword there is should, we’ll happily take them all,” Riyadh Air CEO Tony Douglas said in an interview with Reuters on the sidelines of the Arabian Travel Market conference.

EARNINGS RECAP: HII reported first quarter results on Thursday, surpassing EPS expectations and falling shy of revenue consensus. The company expects full-year shipbuilding revenue of $8.9B-$9.1B. “We are encouraged by the pace of our operational initiatives in 2025. We expect throughput to ramp as we move through the year and, coupled with our cost savings initiatives, we expect steady improvement in support of our operational and financial goals. We are also very supportive of the administration’s commitment to expand our nation’s shipbuilding capabilities and the maritime industrial base,” said Chris Kastner, HII’s CEO.

Howmet Aerospace (HWM) also beat adjusted EPS expectations in its Q1 report. IN addition, the company issues Q2 and FY25 guidance. Howmet Aerospace CEO John Plant said, “The Howmet team delivered a solid start to 2025, setting quarterly records in revenue, Adjusted EBITDA, Adjusted EBITDA margin, and Adjusted Earnings Per Share while exceeding all aspects of our baseline guidance. Margin progression within the Fastening Systems and Engineered Structures segments was particularly noteworthy. Free cash flow was healthy at $134 million, up from $95 million in the prior year, and marked the eighth consecutive quarter of positive free cash flow generation.” Wells Fargo raised the firm’s price target on Howmet Aerospace to $145 from $118 and keeps an Equal Weight rating on the shares. The firm said it worried Howmet would struggle to meet Q1 investor expectations, but the company did not disappoint. Guidance appears to have further upside, however, Wells remains cautious with the stock trading near all-time high valuation.

ANALYST COMMENTARY: Wells Fargo analyst Matthew Akers says early details on the U.S. government’s fiscal 2026 budget request imply Department of Defense spending above expectations and higher than what is currently priced into the stocks. Bloomberg noted the Trump administration will release a “skinny” version of its fiscal 2026 defense budget. Wells noted the DoD’s top line is clarified at $961B, a 13% year-over-year increase, although this includes some reconciliation bill funds. Assuming $50B of reconciliation included would imply 7% growth and up 4% versus the fiscal 2026 level assumed in last year’s long-term budget outlook the firm adds. “The top-line number is likely a big win for defense stocks today,” contends Wells.

Bernstein upgraded Boeing to Outperform from Market Perform with a price target of $218, up from $181. Boeing is now “making the progress it needed for the growth trajectory” expected before the Alaska door plug accident in January 2024, the analyst told investors in a research note. The firm believes that after high Federal Aviation Administration scrutiny, Boeing Commercial Airplanes “should be on a much firmer path than in 2023.” Bernstein points out the company’s new 787 guidance was above our expectations, as it is expected to move to seven per month before year-end, with quality and heat exchanger supply issues resolved.