Despite strong fundamentals: investors are cautious into 2Q A&D earnings

研报英文原文证据摘录

Despite strong fundamentals: investors are cautious into 2Q A&D earnings

Defense

Are we at a turning point in M&A?

The Trump administration’s January EO “Prioritizing the Warfighter in Defense

Contracting” called out the industry for prioritizing investor returns over the warfighter

and suggesting prohibiting defense contractors from paying dividends or buying back

stock. If the defense primes take a more cautious posture regarding returning capital to

shareholders, we wonder where will management teams direct excess cash? We believe

this reallocation of capital could drive more M&A transactions in A&D as management

teams seek to add new capabilities in-house.

Primes can afford high defense tech valuations with cash in their pockets

We believe defense primes may be willing to pay a higher premium for private defense

tech assets with skyrocketing valuations to capture high demand technologies aligned

with Pentagon priorities. Capital must be deployed elsewhere if it can’t be returned to

shareholders and we don’t expect the primes to just sit on excess cash. In our view, this

could indicate a shift in what has been an unprecedented period of defense tech and

space IPO activity if strategics are willing to pay more than public investors. Lockheed

Martin’s recent acquisition supports this thesis. LMT acquired Ultra Maritime from

Advent International at 5.9x sales, the company’s fourth M&A deal this year. Ultra’s anti-

submarine warfare technologies are certainly in high demand, but we’re unsure how well

the asset fits into LMT’s broader portfolio. More importantly, as we said after the deal

announcement, why didn’t Advent take Ultra public?

Expect accelerated contract activity into Oct 1

As the US government’s fiscal year-end rapidly approaches, expect to see contracts