The beep heard ’round the world sounded like a garbage truck going in reverse. And anyone with a ham radio set could hear it.
Those tones from the newest light in the sky in 1957 – Sputnik – brought fear and dismay: America was losing the Space Race.
Source: National Geographic
The nation’s sense of security and superiority was shattered. Russia had a rocket that could send a nuke to anywhere in the world in a matter of minutes. American efforts to launch a satellite were ending in embarrassing failures.
The “Sputnik crisis” led to Congress pouring billions of dollars into defense, research, science and education programs.
Though Russia took an early lead, the U.S. eventually claimed victory by putting a man on the moon.
Today, a new space race is brewing. This time, our rival is China.
Last week, the Chinese space program announced plans to put astronauts on the moon before 2030.
Though it seems like China is far behind the U.S. and its allies for now… it has high ambitions and is catching up quickly.
China is the country with the second-highest spending on space programs. In just the past few years, it’s launched a space station, started building a space telescope, brought back samples from the moon, and sent a satellite and rover to Mars.
In 2019, the U.S. military created a new branch to once again become the top contender in the Space Race: the Space Force. And it remains the only dedicated independent space force in the world today.
Now, government spending can be a reliable source of profits for companies with the know-how to land lucrative contracts. And here at the Intelligent Income Daily, we know that when politicians make up their minds to fund major projects like the space program, there’s money to be made.
Today I want to show you why defense spending is set to keep increasing and why certain companies are likely to land the best new contracts. I’ll also give you the name of one company that is set to benefit if the space race heats up again.
Defense Spending Ramping Up
After weeks of drama, the debt ceiling crisis is finally over.
But did you notice one significant detail on the bill that was finally signed into law?
Despite Republicans making a big deal about reducing government spending, the agreement they made only cuts non-defense spending.
And they’re already looking for ways to increase the defense budget.
The U.S. isn’t the only country prioritizing defense spending. The conflict in Ukraine caused many European nations to increase their military spending. Tensions in Asia are also leading to increased spending to counter China’s growing military strength.
According to the Stockholm International Peace Research Institute these are some of the countries with the largest increases in military spending last year:
And Ukraine? Its military spending increased by 640% last year due to the war with Russia.
That provides lots of opportunities for defense contractors to land contracts for supplying equipment and technology to the U.S. and its allies.
But most of these deals end up going to just a handful of companies.
That’s because the government prefers to work with companies that have a history of delivering on promises… And in the case of military projects, working with top-secret and classified information and technology.
The companies that receive the “prime” contracts work directly with the government to make sure it gets what it wants. It puts them in an advantageous position because they can outsource parts of the project to subcontractors while keeping a slice of the profits for themselves.
And our favorite among these are the ones that pass along some of those profits to shareholders…
How to Profit from Defense Spending and the Space Race
One of these defense contractors is L3Harris Technologies (LHX).
It’s one of the top 10 prime contractors for the U.S. Department of Defense. Two-thirds of its sales come through prime contracts.
L3Harris specializes in producing intelligence, surveillance, and reconnaissance communications systems with specialized sensors. It’s also highly involved in space systems, serving as a prime contractor on satellite systems.
The company recently agreed to buy Aerojet Rocketdyne (AJRD), which will expand its portfolio to include missile and rocket parts. This includes those used in NASA’s Space Launch System and weapons such as Javelin and Patriot missiles.
The company has increased its dividend every year for 22 years and currently yields 2.5%. Shares trade at under 15X earnings. That’s its lowest valuation since 2016, making right now a good buying opportunity.
If the space race heats up, the company’s rocket and satellite technologies put it in a great position to land more contracts. And shareholders should benefit as a result.
But even if it doesn’t, there’s one other tailwind for the entire sector.
The U.S. has provided more than $46 billion in military aid to Ukraine so far. And that’s set to keep increasing as the war drags on. That means more business for companies like L3Harris in the years to come as the government replenishes its arsenal.
This is promising for L3Harris, but also for a few other opportunities we watch closely. We have two other defense contractors in our Intelligent Income Investor portfolio. They’ve returned 18% and 38% since we recommended them to our premium subscribers. And these catalysts should provide an excellent boost to both.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily