KippsDeSanto & Co. Industry Week in Review – November 23, 2018

Summary

India is expected to finalize its agreement with Russia to purchase S-400 air-defense missile systems for over $5 billion.  Moreover, the United States sold more than $900 million worth of missiles to Japan and NATO’s Support and Procurement Agency to bolster their defense capabilities. In addition, the current financial auditing effort at the Department of Defense (“DoD”), which was established to improve efficiency and reduce waste throughout its various divisions, identified major inefficiencies in the department’s information systems.

Aerospace & Defense Update

India is expected to finalize its agreement with Russia to purchase S-400 air-defense missile systems for over $5 billion. Over the past several months, the United States has sanctioned countries that partake in trade agreements with Russia in an effort to limit exports from Russia’s defense industry; Russia is currently the second largest defense exporter in the world. However, the United States is also attempting to strengthen its relationship with India as it sees India as a strategic and stabilizing force to counter China’s growing influence in the region. Over the past five years India has increased its purchasing of U.S defense products by over 500%, but also remains the second largest buyer of Russia arms. If the United States does not sanction India for its agreement to buy Russian arms, it could weaken the United States’ stance against Russia and set a precedent for other countries to participate in trade with Russia; at the same time, imposing sanctions may harm its growing relationship with an important ally. No announcement has yet been made regarding potential a final decision on any sanctions.

This week, the U.S. State Department cleared $944 million in foreign military sales to send missiles to Japan as well as NATO’s Support and Procurement Agency, which is set up to allow NATO countries to buy commonly used weapons systems. In this case, the weapons will be divided among Belgium, the Czech Republic, Denmark, and various other NATO countries. Raytheon is the primary contractor for the Japan deal, which sent several tranches of missiles, including SM-3 missiles and AIM-120-C-7 advanced Air-to-Air missiles to bolster Japan’s defense capabilities. Boeing and Raytheon partnered to be the prime contractor on the self-guided missiles sent to NATO.

Government Technology Solutions

The current financial auditing effort at the Department of Defense (“DoD”), which was established to improve efficiency and reduce waste throughout its various divisions, identified major inefficiencies in the department’s information systems. The report emphasized DoD vulnerabilities to cyber-attacks — which have become a more frequent occurrence in the past few years. Given the size and complexity of the audit, the DoD did not expect to pass; however, the intent of the audit was to uncover potential areas for improvement. The pentagon comptroller, David Norquist, suggested that the department recognizes the flaws unveiled by the failed audit and intends to mitigate them: “We didn’t pass. That’s the blunt and bottom line. We have issues and we’re going to go fix them.” The DoD will continue its 28-year effort to audit its $2.7 trillion in assets, making it the largest organization ever audited. Ongoing efforts to modernize government IT and bolster cybersecurity represent a significant tailwind for technology solution contractors.

Big Movers

Bombardier (Up 43.0%) – Share prices were up this week as Bombardier launched its new global 7500 class business jet. The business aircraft was well received by the market due to its innovative design and renewed focus towards passenger comfort.

Boeing (down 7.0%) – Share prices continued to fall this week after information surfaced that Boeing pilots were not adequately trained to use the 737 MAX jet features. The plane was involved in the Lion Air plane crash in Indonesia last month.

Transactions

No relevant transactions were announced this week.

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