Speaker A
Hi, Steve Eisman here. So, we talk to a lot of analysts who cover a lot of different sectors. Some are more timely than others. Today is going to be a very timely sector. We're going to be talking to Peter Arment, who is at Baird,
Steve Eisman interviews Peter Arment on how Silicon Valley is reshaping the defense industry through innovation and venture capital funding.
Key Takeaways
- The defense industry is highly consolidated, limiting agility and innovation.
- Silicon Valley is increasingly influencing defense through startups and venture capital.
- New defense tech companies focus on rapid, cost-effective solutions versus traditional exquisite systems.
- Ukraine conflict exposed weaknesses in the traditional defense industrial base.
- Significant venture capital funding is fueling a new wave of defense innovation.
Summary
- The defense industry has consolidated from 60 prime contractors in the 1980s to only 5 major companies today.
- This consolidation has led to an overconcentrated industry focused on cost-plus contracting and producing highly sophisticated but expensive weapon systems.
- The 'Last Supper' in 1993 marked the start of major mergers among defense contractors due to post-Cold War budget cuts.
- The traditional defense industry struggles to rapidly respond to emerging needs, as seen in the Ukraine conflict where low-cost, fast solutions were required.
- Silicon Valley had a 20-year period of disengagement from national security interests until around 2017.
- Palmer Luckey, founder of Oculus, pivoted to defense tech by founding Anduril Industries, which is now valued at $60 billion.
- Anduril and other startups bring a Silicon Valley mindset to defense, focusing on faster, cheaper, and innovative solutions like drones and uncrewed fighter aircraft.
- Venture capital and private equity have invested $66 billion into defense tech companies between 2020 and 2024.
- This influx of capital and innovation is creating a new, dynamic defense tech ecosystem outside the traditional prime contractors.
- The episode highlights the tension between legacy defense contractors and emerging tech-driven companies backed by venture capital.
Full Transcript — Download SRT & Markdown
Speaker A
and he covers the defense sector and the aerospace sector. I mean, I can't even think of a sector that's got more going on in it than what Peter covers right now. So, we're going to be talking about large defense contractors,
Speaker A
small defense contractors, and then we're going to move on to aerospace, and some smaller companies, some nuclear reactor companies. It's going to all be very interesting, and I'll be back afterwards with some final thoughts.
Speaker A
Hey, this is Steve Eisman, and welcome to another episode of The Real Eisman Playbook. And today we're going to talk, well, it's going to be a very interesting episode because today we have as our guest Peter Arment from
Speaker A
Baird, who is the aerospace and defense analyst. Peter, welcome. Thanks, Steve. Great to be here.
Speaker A
So, Peter, I mean, there's so much crazy stuff going on in your—I don't even know where to begin.
Speaker A
I don't know what you're talking about. There's nothing going on. Exactly. Everything's calm. So let's—I mean, you cover defense and aerospace. So let's start with defense, and let's imagine we're at a cocktail party and I just met you and you tell me what you
Speaker A
do. Yes. And I say, you—I invest. I know a little bit about your sector.
Speaker A
Could you summarize for me in five minutes or so, very high level, what's going on in your sector these days?
Speaker A
Well, let's talk defense first, as I think that's more topical than aerospace. So you need to think about the way the industry was structured, right? So we had in the 80s, we had, you know, maybe 60 defense prime contractors.
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And when you say prime contractor, what does that mean? So prime meaning you are the system integrator. So you are building the whole thing. You're taking all the parts from the supply chain. So the F-35 gets assembled by Lockheed Martin, and
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they've taken in the engines from Pratt & Whitney. They've taken in all the parts and are responsible and they're responsible for putting the final product together. Whereas you might be talking about a supplier who maybe only makes a widget that's part of
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that. So they used to be 60 primes. Used to be 60 primes. And then in the early '90s, after the Cold War ended, the peace dividend was kicking in. There was a famous dinner that took place at the
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Pentagon on July 21st, 1993. And it became known as the Last Supper. Literally. Seriously?
Speaker A
Yes. This is a well-known thing. Who was it? So, the dinner was, um, so at the time, Defense Secretary Les Aspin, right? Uh, and Under Secretary of Defense William Perry, who eventually became Secretary of Defense, uh, invited all the
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heads of the CEOs of the defense industry and said, "Game's over. Cold War's over. Budgets are going to be cut in half. You guys all need to get together." And when you mean get together, mean consolidate?
Speaker A
Yep. So, the industry went through this period of about 15 years of consolidating. That's where Lockheed and Martin Marietta got together. Northrop and Grumman got together. So, that's where all these big names came together.
Speaker A
So my point of bringing that up is today there's only five from 60. From 60.
Speaker A
Wow. So the industry is massively overconsolidated and basically 50% of the procurement dollars, the weapons spending at the Department of Defense or Department of War as it's known today, um, goes through about these five companies and so 50%
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50%. So the industry has really overconsolidated. Why do you say it's overcon? I'm going to get to that because it leads into why there's going to be this whole other industry that's developing. So, we go through this period where we've got a
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lot of M&A. Uh, the big guys are winning all the business. Um, and you start to think about, you know, um, but they're not in the business of—they're in the business of charging by
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the hour. So, so they're not in the business to, hey, let me find out how fast we can build that for you and give it to you. It's we're going to basically cost-plus contracting. The
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incentive is not there. So they have a lot of cost-plus contracting. So what you end up getting is we make exquisite weapon systems. We really make fantastic stuff. But a lot of that is, uh, some of that doesn't need to be at that
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level. It needs to be faster, cheaper, you know, and built in kind of more today. And so what has happened is you went through a period of time where that's all the only answer you got was they would deliver you an exquisite
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system at a very expensive price. What do you mean by exquisite? So exquisite would be, um, so the F-35 is an exquisite platform, right? It's a, a stealth—
Speaker A
It's a great point. Great point. Great fighter aircraft, uh, you know, fifth-generation fighter, uh, unmatched in the sky. That's like an exquisite platform or some exquisite spy satellite, you know, highly classified stuff versus say some commercial drone
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that could be used for some sort of military application. That's not really—that's much cheaper.
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That's much cheaper. So exquisite kind of puts it at the upper end. So that's what the kind of the industry has kind of—it's top-heavy with these big guys, right? And so the example we use is that when Ukraine happened in February of
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2022, um, you quickly learned that our industrial base has atrophied under that environment. Meaning we're not able to respond quickly and to deliver a system that's needed. So for example, the Ukrainians were saying,
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"Hey, we might need some, you know, some low-cost drones or interceptors," or we couldn't supply that. We can't—we couldn't move fast enough. So, so, so the industry has, so this all goes back to where all these upstarts are coming
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from, right? All these upstarts. Now, why, how did that start is because, um, there was about a 20-year cooling off, uh, in Silicon Valley between 1998 and 2017 or 20, you know, somewhere around there where it wasn't really cool to support
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national security in Silicon Valley. Silicon Valley, right? Palmer Luckey, founder of Oculus, he's the former founder of Oculus, sold it to Meta. Um, famously worked for Meta up until about, uh, 2016. Decided he announced that he was supporting Trump.
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He got, uh, fired by Mark Zuckerberg, um, because it wasn't the cool thing to do.
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So he formed Anduril Industries, which is a private company, which is a private company, but worth, you know, valued at 60 billion today, um, and is building a lot of defense tech hardware stuff at a very fast pace,
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right? And the reason they got jump-started is because Palmer is a—he's a genius, but he's also friends with all, um, Peter Thiel and Trae Vass Horowitz, all the VC crowd. They all started backing that whole industry, the defense tech
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industry, if you will. And what it has done is, uh, the Pentagon didn't even talk to Palmer Luckey for two years in 2017. I think he only got a first meeting a couple years later. Now, of course, they're involved in a lot of things,
Speaker A
right, with, so like a lot of different, uh, drone platforms, a lot of different, um, they're working on a, uh, uh, a tactical, uh, fighter aircraft that's uncrewed, known as Fury. There are a lot of different, you know, pieces that they're
Speaker A
working on. But the whole point of bringing this up and to come back to you about what's going on, the industry overconsolidated, they aren't able to respond. Ukraine happens and, and meanwhile the venture capital arm of the
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United States has been fueling all these defense tech companies who are purpose-built, who come with a Silicon Valley mindset. So now you've had this doesn't matter whether you go to Austin or you go to all the Southern California
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these defense tech companies are everywhere and $66 billion between 2020 and 2024 has come into the defense industry through venture capital private equity. So, so there's an enormous amount of capital that has been put to work. So,
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back to a pre-laster environment. The pre we're going back to the 80s where there's going to be 60 defense primes.
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Maybe there won't be 60. That's an exaggeration, but you get the point. We're swinging back. And so, the primes are left in a position. They're not struggling right now because defense budgets are a trillion dollars and going higher. But over time, there's a share
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shift going on. a share shift from say the exquisite things that we still need.
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Okay, we're still going to do that, but we need these lowerc cost purpose-built systems and these guys can do it faster, cheaper, and they're building and they can't respond. So, it's brought in a whole uh new in institutional crowd
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uh that's investing in these names. So, there's a lot going on. The primes are still doesn't mean they're they're they're bad stocks. It's just that these high-f flyers over on this side are seeing, you know, more private companies. A lot of them are coming
Speaker A
public and we'll talk about that. You know, we'll get to that. Yeah. I am flagging what's coming up on our premium service. On Wednesday, May 27, I will post an interview with Lakshmi Ganopathy of Unicus Research. Lakshmi is
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Speaker A
premium.realismanplaybook.com. What about the impact of the war in Iran? What kind of impact is that having on the sector? Because because I I had a sort of a question I didn't understand.
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Group has done well for a while and then pretty recently it's had a massive correction and I I I'm sort of bewildered given that there's a war going on why people would be selling defense stocks.
Speaker A
I can tell you about that that so that so if you came in if I was sitting here in early January I would have said Steve there's going to be a large reconciliation bill that's coming. At the time I would have told you it would
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have been 450 billion. Uh the number that's out there now formally is 350 billion. And reconciliation is basically a strategy that whatever party in power uh is going to they don't need anyone else's votes. So you're basically going
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to be able to get it through uh the House and Senate and you're 50 plus and you're going to get through. So we've seen it in other examples before. We saw one last year $150 billion reconciliation. 113 billion went to
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national security. So okay, so I'm sitting here in January. I say Steve, there's a large reconciliation bill coming. we need to own all these defense names. They're going to do well. Well, that's what was in the market. So, the
Speaker A
it started to price in where you started to see multiples expand. These stocks were doing well. What happened? Iran war kicks off and these stocks start selling off and you go, "How is that possible?" Right? It doesn't make any sense.
Speaker A
Well, it fractured the votes in his own party. The administr there's if you if you took a poll right now and say, "Could reconciliation pass?" Probably say no because there's some in the party that are not happy with a kind of
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forever war scenario. doesn't mean it's a forever war, but it's they they might not have the votes. So, all of a sudden, 350 billion of funding might not happen.
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So, these stocks are saying, "Well, wait a minute. Are we looking at peak defense spending 6 months ago, but what about um I mean, Hexath is asking for like one a half trillion." Well, so okay, so the So, you had this reconciliation and
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what's the one and a half trillion? So, okay, so I should have explained that better. the one the the the the full 1.5 trillion is a base budget of 1.1 trillion plus 350.
Speaker A
Okay, so that's where you kind of get that close to 1.5 trillion. So if you all of a sudden are taking the 350 away or it doesn't look like it could get passed, then everyone's thinking, okay, the base
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budget looks up modestly, but what happens? Are we if you get slaughtered in the midterms, are is this really peak defense spending? These multiples are too high. So that's why the stocks are that's why they're not working.
Speaker A
Um I have a war question. Sure. So hard to figure out like what's actually going on in the war from all the newspapers because you know you got the left papers, you got the right papers, they don't what's not being
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reported. What's not being reported but one one issue that's sort of come up and maybe you have insight into this because you speak to the companies is that the US is low on munitions because of all the munitions that we've used in the war. M
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have you heard that from your companies at all? Yeah. So, no one's going to, you know, inventory levels are, you know, classified and they're strategic in nature and so, but we were uh at a very low stock of kind of basic uh munitions
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going into the Ukraine conflict. We were in low stock before Ukraine. That's right. So, we sent $69 billion of equipment to Ukraine um up through the Biden administration.
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Uh and and a lot of that's armored vehicles. It's not all munitions, right? So, it's a it's a bit it's a big number, but we were struggling to keep up with the consumption of missiles, uh, drones, tactical drones, all that stuff. So, we
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were at a kind of low level. So, we've we've been upping the spending to kind of keep up. What we've what we saw on the on the depletion side that people are worried about and they're not talking about, but it's probably most
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likely true is um we've blown through a lot of interceptor uh uh capacity. So, Patriot missiles, THAAD, which is an acronym for um high altitude, you know, missile interceptor. So, these are all missile defense kind of systems. A lot
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of that that we sold to our um Gulf Coast allies and Israel certainly has a lot and a lot of a lot of those are expensive exotic systems, exquisite $4 million for one Patriot missile interceptor.
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4 million for one. One and to get that down. Yeah, it's a problem. It's a problem. And and you know, it's not the UAE's fault or whatever, but those are the systems they have. So when a Shiad uh $20,000 drone from Iran comes
Speaker A
in, they're going to shoot what they have, right? And so they've used So they're shooting an expensive missile at a cheap at a cheap drone.
Speaker A
That's correct. And so we've and so and it's not like you can just turn to uh Rathon which is the defense unit inside of RTX right which is the big defense company or Loheed Martin who also makes Patriot um uh they're to say hey we need
Speaker A
more 4,000 more of those. It takes time for these to ramp up these big systems.
Speaker A
You know the supply chain is multiple years. I'll give you an example of so um Stinger missiles became popular in the when we supported the um uh Afghanistan against Russia. We were shooting their you know helicopters and Stinger
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missiles, right? So Ukraine happens and uh the Pentagon comes to you know RTX and says to their Rathon operation, we need more Stinger missiles. And they said you know that's that's awesome. You bought 20, you bought 50,000 between
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1980 and 2000 and you've bought about 1,200 since that supply chain has atrophied. It's gone.
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Right? So, cuz it's not warm. It's not able to just turn on a dime and ramp up.
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So, that is sort of a representation of what has happened throughout the whole defense industrial complex, which is over consolidation, a not being incentivized to move fast.
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cost plus kind of environment and then um so not being able to respond in a more industrialbased you know kind of need and requirement. So even if I told you peace breaks out tomorrow globally, we're going to stay at a very high level
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of spending because we have to replenish. Not only replenish, we just we're not going to do that again. We're not going to be left flat.
Speaker A
We're not going to be flatfooted. And in Europe, it's even worse. So let before we get to Europe, let's turn to things from the Pentagon's perspective. what's happening within the because every every every five years, seven years, you hear about
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we're going to reform the way defense spending is done or contracting is done by the Department of of of War defense.
Speaker A
Correct. I think we're going through another one of those periods. What what is this administration trying to do and what do you think is realistic? So you need to look at the people underneath Hegathth which are uh Emil Michael um Fineberg
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who ran uh service founded service right he's there yeah these are real people these are real people these are uh they come they don't come from uh uh like kind of a a politician being put into these roles
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these are real people that run real businesses and they come with a different mindset and they are bringing a move faster mindset um which is helping fuel this whole defense tech ecosystem that we're talking about that many names are being you know funded by
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VC or private equity because they see the opportunity in front of them. They've got the Pentagon saying we've got a problem. We've got a gap here. We need this solution. And you you have the primes who are built to say well we
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don't really do that unless you pay us to do the R&D work. And you've got the defense tech guys who are saying, "Hey, our business model is what's your problem? Okay, we'll see. We'll solve it and then we'll come back and hand you
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the price. We're not going to say we're waiting for an R&D contract, whatever." So, you've got a completely different kind of in the way the industry is kind of evolving. So, it is happening.
Speaker A
Acquisition reform is happening. I would say um it's probably the most bureaucratic building in the planet. So, it's going to be hard to make a lot of those changes, right? But what you saying the Pentagon's bureaucratic?
Speaker A
Shocking news. Am I making am I breaking news here with you? Sorry. Yes. Yeah.
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Let's talk about the primes. Yeah. Um, how do you think about I mean they all do different things and yet there's overlap. How do you think about them?
Speaker A
You're recommending some, you're not recommending others. Like like just walk us through like like how do you think about these companies?
Speaker A
So um enormous visibility. Um what does that mean? visibility meaning um the the backlogs are multi-year, the production schedules are multi-year, the demand signals cuz the world is a dangerous place. So the demand signals are very robust both
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internationally and domestically. So they've got they this is this is a good time to be in the defense industry in general and the primes are certainly ground zero. They're in the middle of it all. Um they from an industry
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perspective they all have kind of their swim lanes. So Loheed Martin is the producer of uh the F-35. I it's it's the only high volume production uh fighter aircraft that the US builds today.
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It's performed very well during the war. It's an incredible air uh fighter aircraft and very expensive in the world but very expensive.
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Very expensive. How much is each F-35? Um well Loheed Martin will tell you 80 million. I'll say it's more than that, but let's say 80 million. Let's be nice.
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80 million a copy plane a copy and better not get shot down. I mean, that's probably expensive.
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$100,000 an hour to operate. $100,000 an hour. So, so this is uh this is this is the deep end of the pool when you're playing in this uh kind of uh with the F-35 and other parts. But so, the Primes are
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building exquisite important systems. Uh they're delivering, they're helping obviously the uh the mission for the war fighter. Um they're really well positioned from the perspective of for a long time as I mentioned over consolidation. So what have they been
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doing with all their excess cash because these are enormous cash generators. Right. Right. Because the government pays in seven days.
Speaker A
Seven days. Seven days. You I know you would love that. You send the bill and you get paid seven days.
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Seven days. So the cash flows cash flows of this are that's better than the podcasting business.
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It's pretty good. So So if you can if you can get that business, you're going to hold on to it. So these are they've been enormously cash generative.
Speaker A
Okay. So then what have you been doing with that cash? Well, because the industry over consolidated, the only playbook for the last really 15 years, 12 years has been to buy back stock and pay a healthy dividend, right? Hasn't the government put a stop
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to that? So this administration said, "You guys aren't investing enough." Well, why? Because you haven't been able to respond to our requirements from Ukraine and all these other aspects. So it's all starting. You can see how it's all like
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you're not being able to move fast enough. You're turn turning around and and and giving us, you know, exquisite systems when we or exquisite proposals when we maybe need something fast, quick and and cheap and affordable, right?
Speaker A
And so they're not really built for that environment, but they are still cash gener generating a lot of cash and they will continue to do that. So, what have you noticed on all the up the past earnings calls that took place,
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particularly this most recent uh fourth quarter earning season that was in January and early February was no one talked about buybacks. They all talked buying back stock. They're not buying back. They're ramp well they're ramping up their capex because they have to
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because they're being required and so they're being they're pushing into capex. So, it's another part of the capex cycle requirements that are going on in throughout America where we're seeing a lot of capex being put to work.
Speaker A
Defense is just another part of it. So, as an example, when you were saying how the supply chains are dead, they must be spending money to resuscitate the supply chain.
Speaker A
That's right. The money's not just going into their own footprint, but it's going down into tier one through four, you know, within the supply chain to help support to get things up because there are plans for all of them to ramp up. If
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you're in the missile or missile defense business, so Lockheed or you can't say to the Pentagon when the Pentagon comes say, "We'd like to buy some more Stinger missiles." Sorry.
Speaker A
You really have to have a better answer than that. Better answer. You have to have a better answer. And so that is so they're in a position where now they're they're having to invest and they're trying to respond and and maybe
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they're just going to wait out the administration and maybe things will go back to, you know, the way they've had it for years. But the other angle is over here on this side, the defense tech side that I was talking about, they're
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not going away because that's an awful lot of money that venture capital and private equities put to work and they're and they are winning business and over time they're just going to have less shots on gold to win business over here
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on the defense primes because some of that work is going to go over here, right? And so there's a balance and that's why, you know, look, can those stocks work? Sure. They're not nowhere near the multiples that the the high-f
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flyier defense tech guys are are carrying. So, they're attractive for and they find their own global investor audience because of the multiples they trade at and the dynamics. But the reality is um they're feeling some pressure from the administration and the
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Speaker A
Um, you wrote a report on Lockheed Martin where you argued that the company should be broken up. Why?
Speaker A
Yeah. So I mentioned F35. I'm sure I'm sure the management of the company was just delighted to read that report.
Speaker A
We try to be helpful, Steve. Ju just trying to help you. Just just trying to help out, right?
Speaker A
Understand. So uh so basically the the the the analysis of that is the breakable Locky Martin is um it's really kind of simple which is the F-35 is 30% of their revenues.
Speaker A
30%. 30%. Okay. So, we have a we know what the numbers are. The the global numbers are basically the US the F-35 is replacing the F-16, right? So, the F-16 was built throughout the 80s and and and and there's, you know, 2400 in the US
Speaker A
inventory and there's another 1,600 around the globe, right? So, the same concept, we're going to build we're going to build 2400 F-35s domestically and we're going to sell, you know, 1,100 to our allies, F-35s. So, the program Eastern Europe,
Speaker A
Middle East, Asia, you name it. So, let's call the program buy for F-35s is about 3,500. That's the program for over what period of time? Uh well I mean F-35 development started in 2000 so we've only seen you know they're
Speaker A
producing 156 a year to today there's about 1100 in the world and about 900 in change are in the US inventory so Israel clearly how many total in the world right now about 1100 so let maybe maybe 1150
Speaker A
just pause for a second because what there were sentences there that you just said that it should be unpacked. Yeah.
Speaker A
You said that this program started in the year 2000, correct? And here we are. It's 2026 and there are 1,100 on planet Earth.
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1,100 currently in the global in the global inventory. In the global inventory that that are that can get that can go flying tomorrow.
Speaker A
That's correct. At $100,000. That's pretty pathetic. at $100,000 and and for 80 million a pop and $100,000 an hour, it took 26 years to get to 1,100 planes. How is that possible?
Speaker A
That's gets into a lot of different discussions around acquisition reform, acquisition of major military systems.
Speaker A
They actually probably didn't start delivering those until maybe the early 20124 period where they actually started handing over some initial copies to the to the Air Force. So the full rate production is where we are today 156 a
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year. So that's only been in place so last like say six or seven years but over 20 years to get there.
Speaker A
That's right. So that's the problem. That's the problem. That is the problem. So I mean the electronics that they started with in the year 2000 changed 10 times.
Speaker A
One of the delays in the ramp up of the production in the last 5 years was a thing called TR3 technology refresh 3.
Speaker A
Why was why was that refresh three three because we had to update electronics to what we needed for the current standards for what was going on.
Speaker A
I can't even imagine what chips they were playing with when they started. So you can imagine so you have you have the F-35 which is okay. So analyst here I'm looking at this. It's 2026. Uh I wrote this report last year in 2025. uh
Speaker A
you're looking out and you say 30% of revenues if I if they produce at 156 a year, another five years, we're getting close to let's say almost near 2,000 um by the time we get into the early 2030s.
Speaker A
Okay? So, we're we're more than a third through the total buy. Okay? If the total buy stays intact, right?
Speaker A
Because they're expensive. They're very expensive. And guess what's coming? Affordable drones, right? So there's mission creep from other platforms. They're saying, you know, so if you're Taiwan and you say, "We need to defend ourselves. We need to and we need some F-35s." Well, that's
Speaker A
going to be a very expensive acquisition process. The distance between China, the longest distance between China and Taiwan is 117 miles.
Speaker A
That's it. That's it. So you can 117 miles. That's it. That's nothing. That's nothing. And that's like the distance from here to Southampton.
Speaker A
That's it. And and and you can do that with you can put up a lot of affordable systems with no human and blood and treasure on board and you can buy a lot more than one $80 million drones.
Speaker A
You can buy a lot of drones. So there's mission creep. So our thought was okay we're going to we don't think there's any train wreck coming for the F-35 near term.
Speaker A
We're not calling that into question. We're just saying 30% revenues. This is a cash cow generates a lot of cash. program's rock solid. But as you get to the 2030s, you are going to start to fall see this
Speaker A
slippery slope. Okay. So meanwhile, we're sitting here and we have let's say at the time Loheed Martin is trading around 15 times enterprise value as a multiple.
Speaker A
What's the PE roughly? P would be kind of um low 20s. Low 20s. Low 20s maybe. Maybe not crazy.
Speaker A
Not crazy. Maybe maybe even 20. Okay, let's call it 20. Let's call it 20 to make the math easier. Okay, so not an expensive story.
Speaker A
Meanwhile, you look over to your right and you look at all the defense tech names and they're trading at 40 times plus EBIDA. They're this, you know, they're they're trading at 70 times earnings, whatever the number is. But
Speaker A
then you look at the piece of Loheim Martin and you go, boy, imagine if their missile uh segment was on its own. What would it trade at? because they're providing all the missiles and missile defense, the ones that you're seeing
Speaker A
supporting Israel, supporting uh you know all our international allies, whether it's supporting everybody wants those missiles after this war.
Speaker A
What would that trade at? Right. Okay. So, let's not even give them a full multiple of what these are over here, but let's give them something. So, we went through the basic sum of the parts analysis and said even if you
Speaker A
broke the company up into three and what would be the three parts? The three parts are so you would have missiles uh in the missile defense business in one piece.
Speaker A
Okay. You had their space business in another. What's the space business? Space a lot of classified satellites. Uh a lot of um a lot of national security.
Speaker A
So it's all national security. So it's it's it's a highly classified portfolio. Um but think of you know they support the NRO. They support everyone. So so but a sizable business. These are not small businesses. the business that I
Speaker A
talked about missile uh the missile business that's a you know 15 plus billion dollar revenue company uh these are not small segments right and the space business 12 billion plus right so you'd end up if those were trad
Speaker A
and and what and and what F-35 is is you you keep that with they also make sorski helicopters you keep all that together and that's remain and so remain everyone is going to know what that is they say
Speaker A
oh but isn't that the F-35 atrophying and falling off a cliff. And I go, "Yeah, at a glacier pace." So at a glacier pace. So then it finds its own natural global and value investor who says, "I know what that is. That's a
Speaker A
cash cow generating machine. It's going to be here all day long." And at the time you were allowed to buy back stock.
Speaker A
Now you aren't. Maybe that'll change. And you would just say, "Hey, all our excess cash is going to go back to shareholders." So you get that dividend play return over here. And then these are the multiple expenders. So given
Speaker A
where the stock is now, right? If I think there's even more pressure, Poof Magic, yeah, the company announced this tomorrow.
Speaker A
Yes. How much according to your math, how much upside is is there in the stock?
Speaker A
So if this were to happen, Yeah. So I think at the to from from announcement to completion, so because these spins take 18 months.
Speaker A
Yes. Um I think you would probably see somewhere between a 50 to 100% return on Locky Martin really from today because of the multiples that you would assign based on just different stuff and the stock obvious is is down like
Speaker A
you mentioned at the beginning uh of our talk here today that you know they haven't been doing well stocks down I think it's down 14% year to date somewhere around there. So at the time when I wrote that report in early
Speaker A
October last year the stock went up a decent amount because there was a view that hey is this really possible? would they think about that? They kind of basically shot it down and said, you know, that's not our that's not what
Speaker A
we're we're planning to do. And now and now the stock is, you know, it's $100 cheaper was 600 and something and now it's 5, you know, 15. So it has participated with the downdraft of defense. It's certainly not going to
Speaker A
participate with the multiples that the other guys are capturing in defense tax. So we still think that that's there's something to be done there, but that I'm just a a voice and opinion and voice in the wilderness. That's it. That's it.
Speaker A
So before we finish up with the primes, which of the primes in your view has the best portfolio of stuff?
Speaker A
So you would say over time you look at North Grumman's portfolio. North of Grumman makes the the stealth bomber. So the the the new one is the B-21.
Speaker A
Mhm. This is replacing the B2. It's a beautiful plant. Incredible looking, right? Um they also are have the contract for u replacing all of our miniman uh um uh ballist nuclear ballistic missiles 400 that they have to uh deal with. Um that is another
Speaker A
massive massive program. Um they also have um they have a third of the F-35.
Speaker A
So a third of the systems that go into the F-35 are produced by North Groman of the systems of the systems. and then they've got a lot of classified space. Um, and so you look at their portfolio, you say these
Speaker A
guys have a lot of uh of big long-term durable stuff that they're producing and that are going to be in need. And at the end of the day, it's a very, I would say, very attractive portfolio if you were
Speaker A
like sketching it out because you've got all you're checking all the boxes. So, we think North of Roman probably has one of the better portfolios. Okay, let's switch gears to the rest of the defense sector stocks that you cover because you
Speaker A
mentioned these private companies that are new and nimble, but you also but there are some of these companies that have that that you could offer the same description to that are public.
Speaker A
Correct. So, give us a flavor for some of these companies like I've looked at them. I don't really understand quite what they do because when I go on Bloomberg they give this like very general description which doesn't say anything, right? Um
Speaker A
you give us a flavor for a bunch of the companies that you cover that are non-prime. Yep.
Speaker A
And what what do they do and what do you like? So look, a bunch of them are drone companies. So uh air environment AVAV is a as a as a as a is the symbol.
Speaker A
Ax is the one that we were just involved in supporting. You just recommended it.
Speaker A
That's right. Um and that's a different one. But um so Aero Environment is a drone company. A environment environment. They're a drone company. They make uh what their their known claim to fame is they make a a weapon called the Switchblade. Uh the
Speaker A
Switchblade is a um it's probably not bigger than the distance between you and I. Um has a um so basically it's a loitering drone. So it has a warhead in it.
Speaker A
Mhm. And so the warhead's about the size of a um the uh Javelin missile which is about 7 and a half pounds. So it basically take out armored vehicles. So it's armored armor.
Speaker A
How much does it cost per shot? Uh we're in the So it's they have different versions of the switchblade. Let's call it um 150k roughly 150k versus 80 million for an F-35, right? But this is only going, you know,
Speaker A
uh a smaller distance. We're saying, let's call it 45 km and under, okay? Right. Switchblades were used extensively in Ukraine. Um we've seen uh so they've they've done well. They've had they've had some success. They're a company that you would say, okay, before
Speaker A
they they had a big merger um with a company called Blue Halo um a year ago, May 1st was the last year when the deal closed, so very recently, one year old.
Speaker A
And it basically doubled the size of the company. So it went from this pure play drone company to where Blue Halo brought in some very um cool technologies. Um they have directed energy weapons, so lasers.
Speaker A
The world is going to lasers. We can talk about that. What does what does a laser do? Well, so it's putting light on on on a on an object. So you're basically it's it's really based on semiconductor wafers
Speaker A
that you're putting through amplifiers amplifying light and and and you're you're you're putting energy on a target. And so uh we've seen their locus uh weapon system tested in Albuquerque.
Speaker A
So what is give me example like what could this do? So this the test we saw took out a uh DJI like drone that was 2 km away in 2 and 1/2 seconds. took out a drone with the laser.
Speaker A
Two and a half seconds. Two and a half seconds. Yeah. Because it fries the electronics.
Speaker A
Fries the electronics. Wow. So, directionally there's a there's going to be a lot of focus on on lasers in the future. The problem with lasers is it's you need um 2:1 power. So, if you have uh a 50 kowatt laser to take something
Speaker A
out, which is what they're they've they've developed, you need the double of that of power output to enable to make that laser work. So you are sometimes limited by and so that's why we think down the road lasers are going
Speaker A
to be very important on ships and and platforms. There's a lot of power that can be diverted and used on those systems. I see.
Speaker A
But uh so yeah so air environment merges with blue halo doubles their their portfolio. So they have a lot of different things now. Um that's an interesting name that we like. Uh we were involved in supporting um Karman
Speaker A
space and defense which came public. And what do they do? So they interesting enough they were a private equity rollup but in a certain part of the supply chain. So they basically said um you think of a world pre-paceex and you say
Speaker A
okay what was going on pre-paceex not a lot of space launches. Okay so it's pretty simple. So Lohee Martin doesn't want to make a shroud on top of a rocket to cover a satellite because they're making two a year. So they outsource it
Speaker A
to the industry. You guys make this. We don't need our engineers doing this. Well, what happened over time is uh all of that kind of business got outsourced.
Speaker A
You know, kind of nichy engineering kind of related to space, related to missile missile defense. Private equity shop came along, studied it, rolled up kind of seven or eight companies that were all kind of related that were doing the
Speaker A
same thing and created Carman Space and Defense, which basically is a pure play on missiles and missile defense and space launch. So, they are providing components which is now hot, super hot. So, the stock went up four-fold last year. It's now pulled in
Speaker A
about 50% year to date part of this sell-off, right? Trad sold off. The whole group, but trades traded at nosebleleed valuations. Now it's, you know, come back to earth and still trading at 40 times evida.
Speaker A
Wow. Okay. So, so that's what's gone on. It's very exciting. I mean, if we were talking maybe seven years ago, the only real companies we'd be talking about really were the primes. These other companies didn't really were really
Speaker A
public. No. and and there was no real incentive to come public because the old playbook by private equity uh was and venture capital wasn't even in the game, right?
Speaker A
They were sort of just beginning to fund defense tech, right? And space tech the old playbook was build up a business in the defense world and then sell to Loheed Martin or General Dynamics or North of Grumman, right?
Speaker A
But the industry being over consolidated the so now the public markets are kind of the exit track. So give us two more that are interesting.
Speaker A
So uh another one that that we like uh that just uh so the there's um arxis which is another a another all these a names but uh arxis just came public we supported them. Uh this is this is
Speaker A
they're providing they're also providing components along you know uh that are kind of fit into that karman kind of strategy. They're getting pulled along in the supply chain. We like that one.
Speaker A
AX which is the one that most recently I think the one that just a drone company and that is a drone company and the the important thing about AX is drones are classified group one through five.
Speaker A
Group one would be your typical kind of like DJI point of view kind of small drone commercial kind of drone. Mhm.
Speaker A
It might have military applications, but it's still Group five would be like a high-end surveillance uh drone that might be able to stay a loft for a few days, you know, very high-end, might cost a couple hundred million dollars,
Speaker A
right? Uh very high end. Group three, which is sort of, let's call it 1500 nautical miles range. So, a good distance here to Florida, you know, kind of thing. That's drone one-way attack with a with a munition, autonomous. Um
Speaker A
this is where AEX plays. they play in the group three category and what has been in the what's in the highest demand. It's no longer the short stuff uh group one or group two. It's group three because you need standoff
Speaker A
capability, you know. Um so what do you mean standoff capability? So you want to be able to be a great distance away out of harm's way when you shoot something, right? That's the reason the F-35 gets talked about so much because they have
Speaker A
the ability of an F-35 pilot will tell you that he can see the enemy, but the enemy can't see him because he's so far away.
Speaker A
He's so far away. He can see the enemy with his electronics, but the enemy cannot see him.
Speaker A
And so, yeah. So, by the time they uh when they get hit by a missile, they they never knew he was in the sky to begin with, right?
Speaker A
So, Group Three brings a great standoff capability. It it obviously can bring a lot of kinetic capabilities. It's because it can carry a decent sized warhead. Um and and so we need a lot more of those, right? And so if you're
Speaker A
Taiwan, back to the Taiwan example, you want a lot of these. You don't need uh a lot for 117 mile distance, right? Um but with group three or some of those kind of you could you could buy an awful
Speaker A
lot and these are selling. How much are these cost? So AEX is is a sub $100,000 drone which is why they're being being adopted. So that is so cheap. So that gets back to that mission creep around F-35. To our
Speaker A
point was maybe they're not going to need all those F-35s in the future because maybe some of the things you wanted that F-35 pilot to do you could do with this drone.
Speaker A
Yeah. So maybe maybe $100,000. Maybe things are changing and shifting and so maybe you should if you're Loheed Martin you think well maybe we should get out ahead of this before we can't make the decisions to split up
Speaker A
when it's 2030 and that it's already starting to roll over. So that's why we said you need to make some decisions early before we leave. uh defense. I mean, we could talk about this for the next five hours obviously.
Speaker A
Um I I had a war question for you, the Ukraine war question. When you talk to the people in the I mean, the the the most fascinating thing to me about the Ukraine war is you're talking about Russia with an army
Speaker A
multiple times the size of Ukraine can't beat Ukraine. From your perspective, when you speak to people in in the industry, like like how is that possible? What have you heard?
Speaker A
So, the the Russians aren't great at logistics. We saw that early on in the war. They're What do you mean not good at logistics?
Speaker A
You remember the early days when they were building up along the borders and they had their own traffic jam and you could see all that and you'd say, "These are these guys really is this real? Do they really have their act together?"
Speaker A
Where they are exceptional in the Russians is in is in electronic jamming. So, a lot of our early stuff that we sent over there didn't land on target because of the Russians capability to jam things. You got to remember we've
Speaker A
Steve, we've never gone up against a pier. Afghanistan, Iraq, uh you know, the last how many decades of of wars that we've been involved in, this isn't a pier. This is technically a pier that we're up against. So, we were testing
Speaker A
our own stuff and we're finding out their jamming capabilities are exceptional and our stuff isn't landing on target. So it caused I mean our drones or missiles that we were that the Ukrainians were shooting at them missed missed
Speaker A
because they got jammed. That's right. So we were finding so we there was a lot of lessons learned coming out of Ukraine.
Speaker A
Okay. That are being applied in Iran. Well that are being applied in general. In general in general saying which is why we need faster, cheaper, you know all of that, right?
Speaker A
So you think back to Ukraine back to Ukraine. So why couldn't we get further along? But my question is why the Okay, so but but the Russians have multiple more men and munitions than the Ukrainians. They can't beat them.
Speaker A
Yeah. Why? Well, I mean, we we've provided quite a bit of support. That's fair.
Speaker A
We've provided quite a bit of support and with a lot of, you know, expensive systems that have helped. Let's give the Ukrainians a lot of credit. They're incredibly innovative and they're uh they're they're facing uh a much bigger periial
Speaker A
and it's no different the way Israel feels the way they living in Israel and they look around and they say we've got an extential existential threat and the Ukrainians are feeling similar things.
Speaker A
So they're going to think differently, they're going to act differently, they're going to they're going to they're going to move at a faster pace, right? And uh so give them a lot of credit for doing a lot of innovation.
Speaker A
The problem with they've got an incredible drone industry. The problem with why we can't use their drones, they say, "Hey, let's just use their cheap." Yeah. Why can't we use their drones?
Speaker A
They're It's all Chinese electronics. Really? Yeah. They want the electronics from China. They're because it's cheap and fast. So cheap and fast again.
Speaker A
Yeah. So you need So all of that. So we're not going to pull that into our supply chain and our own inventory, right?
Speaker A
But uh good for them and that's great that they're holding the line. Um but yeah, there's it's a real dynamic, you know, regarding uh what's going on over there. Okay. All right. Deep breath.
Speaker A
Yeah. Let's go to aerospace. Yeah. Another area another area that's a go a lot going on. And let's talk about Boeing.
Speaker A
Yeah. Um give us a little give my viewers a history because I mean there was a I remember you know pre all the scandals this was viewed as like one of the best industrial companies in the world. People own this
Speaker A
stock forever. It's a duopoly. It's just it's uh Airbus and Boeing. you could own Boeing forever.
Speaker A
Correct. And then some bad stuff happened. Yeah. Tell tell us what was the bad stuff and what did that do to the company?
Speaker A
Well, before we get into the bad stuff, just so I could give the audience just an understanding of why aerospace is actually a good area to to invest in in the cycles. All right. So, I I was talking to you earlier uh before we got
Speaker A
in here. Um you know, global air traffic has a very high correlation to global GDP. So, if I tell you global GDP is 3%, it's about a 1 and 2/3 multiplier effect on that. say well then global traffic is
Speaker A
going to be 5%. Okay. Okay. So 5%. So if something rule 72 if something grows at 5% for 15 years it doubles right.
Speaker A
So what you have today the way the world is built between the dualopy of Boeing and Airbus is you have every 15 years their installed base of planes doubles because global air traffic continues to compound. And as I mentioned we've only
Speaker A
had four years of negative air traffic growth in the last 40 years. 1991 911 GFC and COVID right and the 91 one was only because North America was uh 45% of global traffic and today it's 19 so you
Speaker A
can see how the world has grown which is why you want to be an aircraft manufacturer because there's that many more planes you have to deliver in the future correct so it's been a Boeing and Airbus world and so you say okay well
Speaker A
let's own a duopoly who wouldn't want to own a duopoly great industrial so so you think it's like owning Moody's and S&P the duopoly something you know about, right?
Speaker A
So, so Boeing, you'd say, "Okay, so they've got this great positioning." Um, and the problem with with being a a Boeing or an Airbus or being in that business in general, the saying is we have to spend billions to lose billions
Speaker A
to make billions. What does that mean? We have to spend billions to develop a plane, right?
Speaker A
Then we're going to lose some money up while we're starting to ramp up production and supporting the supply chain to eventually make billions. So, you don't want to be owning Boeing when they're getting in the beginning of one
Speaker A
of those R&D cycles, okay? Because you're going to get run over with cost overruns because guess what?
Speaker A
That happens. Cost overruns. That happens. Boeing as a company uh uh doubled the cost of what they thought it was going to be to produce the 787 that came to market in 2011. So, they thought they would spend 15 billion. They spent
Speaker A
30. Okay. It's a great airplane. It's a great wide body. Everyone loves it around the world. um and they're getting and they make cash margins on today. So, it's it's it's a platform. Maybe over time you'd say, was it a good
Speaker A
investment? No, they're making a low singledigit margin on it on the totality of the investment, but it's a great platform. Same thing happened when they said, okay, Airbus was decided they were going to put new engines on their uh A320 platform, which
Speaker A
is a rival to the 737. And they said, the reason they had to put new engines on that was because uh they needed more power. their their aircraft was technically underpowered and so they were going to put new engines on it and
Speaker A
that was going to make it quote unquote more efficient. Well, Boeing was left in this dilemma. The dilemma was do we re-engine? Do we put new engines on the 737 or do we do a clean sheet start fresh?
Speaker A
But if you do a whole new cycle, so if you start fresh, that's a 60-month engine development cycle, meaning four years of development, one year of test, right? Flight test. So figure fiveear development cycle and then another three
Speaker A
years to ramp up production. So you're basically telling Airbus when we make this clean this clean sheet she sheet decision you have eight years to to take share from us like crazy like crazy you have eight years right
Speaker A
and they were not in a position to make that call in their early you know 201 12 13 14 period when they made the final decision was let's the bean counters sort of took over and said that's what I heard that the bean
Speaker A
counters took over the company the bean counters took over and the bean counters are from McDonald Douglas which Boeing merged within 1997. Uh, and to make it come full circle for this whole discussion, the only reason that merger
Speaker A
took place in '97 was Boeing thought McDonald Douglas was going to win the F-35 contract that was going to be awarded 3 years later.
Speaker A
No way. Yes. And they obviously did not happen. Not happen. But it's the only reason they did the merger.
Speaker A
Really? Yeah. It was going to shore up their defense business, of course, cuz McDonald's came with some great defense assets. But the real crown jewel was we think McDonald's will win the F-35, so that's why we're going to merge.
Speaker A
Well, that was a bad mistake. So these are big big stakes, big decisions. Anyway, so they decide the Bean Cobs take over and they're going to re-engine the 737.
Speaker A
Mhm. Well, you know, the 737 uh a known platform, but you're basically stretching the limits of what you could do with an existing airframe and and so obviously engineers great for what they can do. Um come up with a great product,
Speaker A
but there was obviously a flaw in the software, which we knew about the two crashes. And so you ended up with um Boeing from a culture standpoint taking a real hit, right? And so now you had um all of these penalties and uh
Speaker A
concessions you had to make to your customers saying not only is your plane not coming in the next year, it's not coming for like another four years, right?
Speaker A
And so all of a sudden the cash flow story went out the window and and cash flow and earnings and earnings across the board. And so uh you were left with um and you had u uh management reshuffleling and so the
Speaker A
street was like wow this is kind of uninvestable right and so for a couple years a couple years and so when we in 2016 when Boeing was hot I would have come in and said Steve you know Boeing's going
Speaker A
to earn $40 per share in free cash flow in say the early 20s okay so six years out or something today if I'm pitching you the Boeing outlook um because they raise so much equity to shore up their balance sheet,
Speaker A
right? And had and there's so much dilution involved. We now talk about low 20s free cash flow per share.
Speaker A
So it's been cut in half. Cut in half. And so what does the stock look like?
Speaker A
It's been cut in half. Like back then the stock was 450 going to 600, right?
Speaker A
And today it's 250 going to 350 or something. But you know it's tremendous. the no longer 600 that we talked about, that's not possible.
Speaker A
Not possible. At least not in this environment. So from a Boeing Airbus world and the world we sit in, um, we're the good news, we're not in an investing cycle. So there's no new airplane coming, right?
Speaker A
So what we have is we have recovery coming out of CO, right? So the there was a a delays in the supply chain and so we've had to come out of that. Uh and now we're just getting back to kind of
Speaker A
ramping up production and that is going to take multiple years. So we we'll probably be you know at sustained high levels of production 28 29 somewhere in there and it's going to stay there without unless there's some sort of like
Speaker A
macro event risk that takes demand off the table. We're going to have this run of a high production for both Boeing and Airbus of delivering a lot of planes to the market and that is going to generate an enormous amount of cash. So the cash
Speaker A
story is coming back to Boeing and we actually like Boeing. We think it's a good stock. I think there's a lot of opportunity there.
Speaker A
But there's been a lot of dilution. But a lot of dilution, but you know, we're playing this cycle. So we're playing, you know, today. So So today we think, hey, we think we we've got a $300 formal price target, but where do we think go?
Speaker A
Somewhere between three and 400. And we think there's a lot of upside. Um, you finish up. You cover some nuclear companies.
Speaker A
Yeah. So Curtis, right? What What are the So yeah, this is the problem with Bloomberg, by the way. You know, I I I went through all your all your stocks.
Speaker A
Yeah. And like, you know, Curtis, right? It says component parts and systems, right? I don't know what to do about what what is that? It doesn't mean anything.
Speaker A
So, there's two names in our coverage universe that have nuclear exposure. So, um Curtis, right?
Speaker A
Curtis Wright and BWX Technology. So, what how do what is their nuclear exposure? Yeah. So, these are fascinating companies. Um because as you know, uh the nuclear industry has not been invogue for 50 years. uh at least at
Speaker A
least I I jokingly say Jane Fonda makes a a movie in 1978 the China syndrome and that was it and we've never seen an update since right all right well what has happened is obviously we know AI and
Speaker A
data centers and all that is putting pressure on the grid um but it was happening before that Ukraine and the energy crisis that was taking place in Europe if you remember right after uh Ukraine so when the day of the
Speaker A
invasion happens that was a Thursday you know why I know it was Thursday because the markets were open and who were all my phone calls? They were investors from Europe. And you know what they were doing? They were taking their ESG
Speaker A
bucket environmental social governance. They're throwing it out the window. Out the window. And I'm done.
Speaker A
And they said, "Which defense company am I buying?" Right. Exactly. So because they were not only worried about what's on their doorstep.
Speaker A
That's what I call people standing on principle. That's it. So they Exactly. So they they ended up they ended up um with not only concerns about um war, but you also worried about an entry crisis. So all of
Speaker A
a sudden nuclear started to get you know not only talked about way domestic Germany shut down its entire nuclear reactor systems just before the Ukraine.
Speaker A
That's correct. Just before that's correct they shut down their last nuclear plant just before Ukraine and they were going to be hooked up to permanently for Russian natural gas.
Speaker A
Russian natural gas. And you could dig into it. There are stories whether it's true or not that the whole green movement in Germany was started by the KGB in Russia. You could probably I'd believe it. Sounds like a Nelson
Speaker A
Deil novel. It sounds like it'd be great. But at the end of the day, who knows? But uh uh but you had this energy crisis, you had a war potentially. So nuclear started to um become percolate, become a topic. Um
Speaker A
and then uh you know AI then landed, right? And so then so now you got all these power needs. Okay. So why does the defense industry have any exposure to nuclear? Well, the only reason the uh supply chain or there's some heavy
Speaker A
manufacturers of nuclear components today in the US is they had to support the nuclear navy, right? Nuclear submarines.
Speaker A
Nuclear submarines and aircraft carrier, right? Well, I didn't realize aircraft carriers have nuclear on them.
Speaker A
That's nuclear powered. They're nuclear. I didn't know that. Yeah. Okay. Uh two nuclear reactors.
Speaker A
Two nuclear reactors on each on an aircraft carrier, one on a sub. Wow. And so uh so you end up so th that industry which is finite. It's not a lot of companies but they've remained in business because they've had to support
Speaker A
the nuclear navy. Right? So today when you think of like Curtis Wright and you say okay what is Curtis Wright? We really like this stock. This is a great stock compounder. It's going to do continue to do really well. The
Speaker A
way we pitch it is it lines up this way. About 55% of their mix is defenseoriented. So they do defense electronics. They also do some pumps and valves for the for the Navy. Okay, so that's 55% of the mix. 15% of the mix is
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supporting commercial nuclear in the United States, which is there are 94 reactors in the US. Okay, so 94 reactors in the US, almost more than 50% of them have all raised their hands and said we would like to extend the life of our
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plants now that nuclear is no longer we're no longer shutting down plants. We're actually reopening three mile island all that, right? So all of them are going through this permitting process of extending their life and it's actually not quote unquote that of a
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much of a challenge for the industry to for for them to do it. So if you're a 40-year plant, you want to go to 60 years or you're 60-year plant, you want to go to 80. The regulators have a
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playbook of what has to be replaced, what has to be done. It's it's a it's an 18-month permitting process and then you just get in line. So Curtis Wright does that for Curtis Wright is heavily involved with lots of components supporting the
Speaker A
install base and 94 reactors in the US. So they it's an aftermarket business. So they they could just exist and they're and but now it's growing mid- teens plus because everyone's redoing, right? So they're getting this then they have
Speaker A
10% exposure to commercial aerospace. So the Boeing Airbus discussion we just had great tailwinds there and then the last little bit 15% of the mix is general industrial. So you say well what's so great about Curtis Wright? Well, they
Speaker A
they're they because of that nuclear navy capability, they retain something known as um they have the ability to produce for Westinghouse's large nuclear 1 gawatt factories a reacting coolant pump. Now, this pump is massive and there are four of them are required if
Speaker A
you're going to build a nuclear reactor on the Westinghouse AP-1000 design, which is the most modern design that exists today in the world. You need four of these Curtis Wright reacting coolant pumps. They're the only one in North
Speaker A
America that can produce these things. Okay. And it takes them 4 and a half years to build them.
Speaker A
So, so if there's any new nuclear reactors built in the United States that are AP1000 design, why why would they be anything else?
Speaker A
Well, exactly. Unless you get unless you start talking about GE Vernova with the small module reactors and things of that nature. So, so we can get into that, but at the end of the day, so Curtis, right?
Speaker A
So, we we like this story because it's been defense tailwinds. It's got nuclear aftermats growing. It's got commercial aerospace tailwinds and it's got, you know, General Dust is fine. So, we love the earnings power, but then you say,
Speaker A
okay, what's the math of that reacting coolant pump? So, they sell a reactant coolant pump for about 30 million a piece. They need four of them. So, one plant is $120 million opportunity for Curtis right?
Speaker A
Right. But it's one of their highest margin products. So, they probably make 25 to 30% EBIT margins on it. So, operating margins, right? So right now today there are 14 AP-1000 plants in play globally.
Speaker A
There's a couple in Poland that are looking like they're going to kick off this year, Bulgaria, other places, right? And then there's and they all have to buy this from them.
Speaker A
Well, Westinghouse, they have the exclusive for Westinghouse's reacting coolant pumps. Okay. So you do the math, 14 plants. So that's that requires four pumps per plant.
Speaker A
That's 56 pumps. 56 pumps times 30 million a piece. So that's about a billion7 in change, right?
Speaker A
At 25 to 30% margins, you're talking over half a billion dollars uh in operating earnings. And on a on a per share basis, it's about $11 per share in earnings, right?
Speaker A
So that kind of earnings power is layering on top of all everything else. So when we sit here and look about Curtis Wright, we say, I get a defense electronics, defense pump.
Speaker A
We like the stock. We like this stock. Great management team. and it's just going to compound and and so it's a great story. Uh the other one BWXT which is a even cooler story is that it's the old Babcock and
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Willox uh engineering construction firm that was owned the nuclear reactor business. It got spun out and became BWC technology. So it's been they have made close to 430 nuclear reactors for the US Navy and never had an accident or an
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incident. They make the reactors that go into the submarines and aircraft carriers. Yep. They make So they have they technically have a monopoly even though we don't use that word. Right.
Speaker A
Now, is there is there commercial applications to this? Yeah. So, uh commercial capabilities. So, that's what I meant. So, they have um uh they bought a they bought a business from GE uh before GE knew what was going on in the world back when you
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didn't like them so much. um uh they sold them uh a big service business in Canada and that uh they so they service all the can do reactors in in Canada um there's 19 of them um and then any new
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kind of small module reactor play anything along those lines so Genova's got the um a great probably the leading small module reactor um called the boiling water reactor 300 it's about 300 megawws so if you think about nuclear
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reactors the big plants are 1 gawatt a one gigawatt power then it goes down to um the small mod reactors that we're talking about in this case the 300 megawatt um so typical coal plant would be about 800 megawws like so you need a
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couple small reactors place a coal plant so if I'm a data center I might want to buy some of these G venova reactors power my own plant well that's the beauty because the most conservative companies in the world are
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the utility companies they've never wanted to sign up for any of these capex projects now they got all these hyperscalers who are willing write these big checks and say, "Hey, we'll we'll we'll we'll build this small mod reactor
Speaker A
right here. Talk to the utility company utilities like fine. We'll put you behind the meter and here you go. You can have clean energy all you want, right?" So, that's why there's this demand pull.
Speaker A
So, BWX Technologies not only benefits from what's going on in the nuclear navy, which is growing and ship building's going up a lot. Um, they're benefiting from all the commercial pull.
Speaker A
And so, it's they're two great stories, right? Different but, uh, good stories that are tied into defense and nuclear navy theme.
Speaker A
Well, that was great. Thank you. That was pleasure to be here and so much to talk about. We could we could be here for another three hours, but I think we stop here.
Speaker A
Have me back in the next cycle. Thank Thank you, Peter. Really, it was great pleasure. Thanks a lot.
Speaker A
Pleasure. Really appreciate it. Great. That was a very interesting interview. Let me see if I can summarize some thoughts here. You know, we started out with looking at the prime defense contractors, the big ones. And seems to me from what he was saying is they're
Speaker A
under they're really under some pressure. I mean they're very profitable. They'll be making money for years, but they're not nimble. They're overconolidated.
Speaker A
And there are a whole bunch of new companies out there, some of which are public, many of which are private, that are much more nimble. And looks like the defense sector is going to be spending a lot more money with these more VC techy
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type companies that do drones and other type of technology stuff than on more F-35s, although they are going to be spending more money on F-35s. So I I found that there's not maybe a lot to do in the prime defense sector, but that
Speaker A
some of the smaller companies which I think are more interesting. There are some companies he mentioned like Ax, which is a new drone company, Aerero Environment, another type of kind of drone company um that I thought were very very interesting. And then we
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talked about Boeing. You know, Boeing has had tremendous problems. they have come through it, but they had to raise a tremendous amount of capital to shore up their balance sheet. So whereas in the past you were talking about a company
Speaker A
that could achieve 40 $40 in free cash flow, you're talking about a company now that achieves going to that's going to eventually achieve $20 in free cash flow. That doesn't mean the stock isn't a good stock here. It's just that the
Speaker A
upside is not quite as high as it would have been if there hadn't been quite such dilution. And then we finished up with two fascinating companies. One is called um Curtis Wright and the other one is called BWX Technologies. These
Speaker A
are defense contractor companies that have exposure to nuclear both on the defense side and on the commercial side.
Speaker A
I know I'm going to do some more work on those cuz maybe these are going to be interesting investments. But I thought those two companies were the most interesting companies that he discussed.
Speaker A
Thanks for watching and see you soon. This podcast is forformational purposes only and does not constitute investment advice. The hosts and guests may hold positions in stocks discussed. Opinions expressed are their own and not recommendations. Please do your own due
Speaker A
diligence and consult a licensed financial adviser before making any investment decisions.
Topics:defense industrySilicon Valleyventure capitalAnduril IndustriesPeter ArmentSteve Eismandefense contractorsaerospacedefense tech startupsmilitary innovation
