2011’s Growing Military Opportunity – Brains Over Brawn

The U.S. military of the 21^st century may be getting ‘smarter’, but is sure isn’t getting any smaller. President Obama will be asking Congress for a whopping $708 billion to spend on various military needs next year. For perspective, that’s 4.1% bigger than 2010’s budget, and 8.7% more than President Bush allotted in his last year of office.

What’s that mean to investors? Two years ago, when Barack Obama was only a Presidential candidate, the assumption was that a military under his command would shrink in size and scope as the U.S. attempted to scale out of conflicts overseas. Thus, the era of easy money for defense companies (annual defense spending more than doubled in the last ten years) would be coming to a close.

Not your father’s military: It was only a few decades ago, fighting a war was straight-forward…. build more and better airplanes and tanks, and deploy them against the enemy’s planes and tanks. It’s becoming clear, however, that modern warfare requires fewer fighter jets, and more technology and intelligence.

Oh, there will always be some need for Lockheed Martin’s (LMT) F-35 fighter, and Boeing’s (BA) C-17 transport plan. The Pentagon just doesn’t need as many of them; 122 of the original 2,456 fighters have been cancelled, and the C-17 order for 2011 was canceled as well (and presumably indefinitely).

It’s not just planes the armed forces needs less of though. The proposed budget will cut spending on OshKosh’s (OSK) heavy trucks by half in 2011. The Navy canceled another littoral combat ship that General Dynamics (GD) had intended to build. The one ship was worth a few hundred million dollars, but could have been worth billions.

The new military hardware opportunity: So if the budget is bigger, where’s all the extra money going?

Some of it’s going to traditional contractors making semi-traditional equipment. General Dynamics, for instance, has been asked to make more Stryker vehicles, and upgrades to the armor of BAE Systems’ (BAE) Bradley fighting vehicles. Those are small contracts to those companies though.

The biggest impact from a bigger and smarter military in 2011 will actually be evident in the obscure companies making ammunition, unmanned aerial vehicles, night-vision technology, and the like.

Picks of the litter: Take Alliant Techsystems (ATK) for instance. It’s not exactly a household name, but perhaps should be…. it’s the U.S. military’s biggest supplier of ammunition. With the troop surge in Afghanistan looming, bullet sales should remain brisk.

FLIR Systems (FLIR) is another company poised to benefit from the military’s technology needs. Though the withdrawal of some troops in Irag has been accompanied by a slowdown in the need for FLIR’s night-vision equipment, similar fighting conditions in Afghanistan may push that demand right back up.

AeroVironment (AVAV) makes one of the unmanned aerial vehicles commonly used by the U.S. military.  It too should enjoy 2011, as the proposed military budget includes a 23% increase on spending on unmanned aerial systems.

There are plenty of other, lesser-known names that could be just as well-positioned to reap the rewards of the military’s transition to technology-based warfare. Brains over brawn is the new path to fiscal success in the arena.