A&D Weekly: Next Electron Launch; Budget on Hold Until September

What's next for A&D? Next RKLB Electron launch scheduled for later in August. Defense budget discussion likely on hold with Congress on recess until September. DSEI defense conference 9/12-9/15 in London. HWM plant tour/investor meeting 9/20.

Commercial aerospace remains one of the best multi-year growth stories in industrials, in our view, with pent-up demand for aircraft driving production higher and production bottlenecks easing. We expect aftermarket demand to slow relative to OE through 2H and into 2024 as comps get much tougher. Within aerospace, we are Overweight BA and HWM.

While defense stocks have traded lower in 2023, we continue to see downside risk, and see spending capped by the debt ceiling deal 2023-24. Slowing budget growth historically has been negative for the stocks (vs. ~10% in FY23), while defense has not outperformed the market during past market drawdowns, as might be expected. We are Overweight on GD, Underweight on LMT within defense.

While not immune from budget risks, O&M (services) historically held up better compared to Modernization (weapons buying). Higher labor cost inflation likely passes through as higher top-line growth on cost-reimbursable contracts. Among the services stocks, we are Overweight on BAH, CACI, and LDOS.

We see a strong multi-year growth outlook for space, although many companies must first survive years of cash outflows. Within Space, we are Equal Weight on RKLB, Underweight on SPCE.