The US Recently Landed a Really Big Deal for Defense Investors
In no time at all, the current administration has certainly lived up to the “art of the deal” making in the Defense sector. Recent activity in this sector has created explosive investment opportunities not found in some time. Companies like Technical Communications Corporation (Nasdaq: TCCO $0.00 – website), are perfectly positioned to capture massive contracts and growth.
So let’s take a deeper look how.
The US recently closed a defense deal with Saudi Arabia that has gotten the attention of the world.
The $110 Billion defense deal, which could be worth an additional $240 Billion over the next 10 years, has created much ballyhoo hype as well as its fair share of criticisms.
At The Money Street, you’ve come to know that we don’t take political positions. Whether you’re a Republican, Democrat, Independent, or you consider yourself a hawk or a dove … we don’t really care. What we DO care is how politics and the current administrations and their political actions will affect the marketplace and uncover specific investment opportunities.
Defense Stocks Take The Offensive
Part of the justification of recent foreign defense dealings in Saudi Arabia is to help modernize their military and intelligence capabilities. In doing so, Saudi Arabia would finally catch-up it’s defense abilities with global allies.
What the Saudi Arabia defense deal has already done is made an impression on the stocks of defense companies. According to a recent CNBC article, “defense stocks soar to all time highs on $110 billion US-Saudi Arabia deal.”
The big named defense stocks Lockheed Martin, General Dynamics, Raytheon and Northrop Grumman all hit all-time highs days after the deal was announced.
It’s no coincidence that the market has taken notice.
Here’s a look at some recent press of a sample of defense companies who are in a position to most likely benefit from the recent dealings:
Market Cap: $80.57B(Source: Google Finance, Yahoo Finance, MSN Money)
Lockheed Martin Plays Major Role In Strengthening United States And Kingdom Of Saudi Arabia Ties To Bolster Global Security
Riyadh, Saudi Arabia – May 20, 2017: The Kingdom of Saudi Arabia (KSA) has expressed its intent to procure more than $28 billion worth of Lockheed Martin (NYSE:LMT) integrated air and missile defense, combat ship, tactical aircraft and rotary wing technologies and programs. This is a major step towards enhancing global security and stimulate economic progress in the United States and the Middle East.
“At Lockheed Martin, we are proud to be part of this historic announcement that will strengthen the relationship between the United States and the Kingdom of Saudi Arabia,” said Lockheed Martin Chairman, President and Chief Executive Officer Marillyn Hewson. “We are especially proud of how our broad portfolio of advanced global security products and technologies will enhance national security in Saudi Arabia, strengthen the cause of peace in the region, and provide the foundation for job creation and economic prosperity in the U.S. and in the Kingdom. These agreements will directly contribute to His Majesty’s Vision 2030 by opening the door for thousands of highly skilled jobs in new economic sectors.” –Lockheed Martin
Market Cap: $60.12B(Source: Google Finance, Yahoo Finance, MSN Money)
General Dynamics Wins Defense Logistics Agency’s Enterprise IT Contract: Company will deliver IT support services to the military, civilian agencies and foreign countries.
Fairfax, Virginia – May 4, 2017: General Dynamics Information Technology, a business unit of General Dynamics (NYSE: GD), was awarded a contract to support the Defense Logistics Agency’s J6 Enterprise Technology Services program. The multiple award, indefinite delivery, indefinite quantity contract has a ceiling value of approximately $6 billion for a five-year base period with three option years.
General Dynamics will provide network and telecommunications, IT solutions, sustainment and maintenance, enterprise data strategy, systems engineering, virtual workforce training, lifecycle management and IT program management support. Work will be performed in various locations worldwide including Columbus, Ohio; Battle Creek, Mich.; Kaiserslautern, Germany; New Cumberland, Pa.; Philadelphia; Honolulu; Fort Belvoir and Richmond, Va.; and Tracy, Calif.
General Dynamics provides the DLA with enterprise communications solutions, services and logistical support. The company is a trusted partner in supporting the U.S. Department of Defense and other federal agencies as a primary source of network and system engineering, installation, maintenance and logistical services to warfighters. -General Dynamics
Market Cap: $46.27B (Source: Google Finance, Yahoo Finance, MSN Money)
U.S. Navy Awards Raytheon $28 Million for Variable Depth Sonar
Tewksbury, Massachusetts – May 23, 2017: The U.S. Navy has selected Raytheon Company (NYSE: RTN) to provide the new Variable Depth Sonar for the Littoral Combat Ship class. The $27.9 million contract followed a study and product assessment phase during which Raytheon proved the solution’s features and capabilities met all of the Navy’s design and performance requirements. A mission-critical anti-submarine warfare asset, the VDS will be deployed from LCS to locate and track enemy submarines.
This ship-deployed sonar system design, identical for both LCS variants, features reduced weight to minimize ship impact, increased maneuverability and it provides the opportunity for increased warfighting payloads. Ease of operation improves crew efficiency and operational effectiveness. These features were validated by the fleet sailors who operated the system at a full-scale demonstration at Florida Atlantic University’s Harbor Branch Oceanographic Institute in August 2016.
Now under contract, Raytheon will advance its design to a full Pre-Production Test Article, expected to be complete in late 2018. The contract includes options for production, which, if exercised, brings total contract value to more than $300 million. -Raytheon
Market Cap: $44.06B (Source: Google Finance, Yahoo Finance, MSN Money)
Northrup Grumman to Provide Full Spectrum of Capabilities to US Army for New D31 Contract
Herndon, Virginia – March 27, 2017: The U.S. Army Space and Missile Defense Command has named Northrop Grumman Corporation (NYSE: NOC) a recipient of the Design, Development, Demonstration and Integration (D3I) contract. The Northrop Grumman team’s broad spectrum of offerings under D3I cover future needs in directed energy, space, cyberspace, hypersonics, and integrated air and missile defense.
Under the D3I Domain 1 contract, the U.S. Army can provide task orders to the winning contractors for efforts supporting the warfighter. As an awardee of the contract, Northrop Grumman is one of eight companies who will exclusively bid on those task orders under the umbrella of D3I.
A unique procurement strategy for the U.S. Army, D3I offers the opportunity for a capability to be designed and produced as a Joint Capability Technology Demonstration (JCTD) sponsored through the Joint Capability Integration and Development System (JCIDS) process. This allows the Army and contractor to provide low-rate initial production capability releases to the warfighter on an accelerated timeframe, greatly decreasing the acquisition process and ensuring availability of mission-critical capabilities to our nation’s armed forces.
“Northrop Grumman is proud to be named as a recipient on this one-of-a-kind program,” said John Parker, vice president and general manager, global logistics and modernization, Northrop Grumman Technology Services. “Our pursuit of this program represents a highly successful enterprise wide collaboration effort, bringing together the most cutting-edge capabilities and technologies for future customer missions from all areas of our business, at an affordable price.” –Northrop Grumman
Market Cap: $1.86B (Source: Google Finance, Yahoo Finance, MSN Money)
Mercury Systems Receives $5.9M Order for Radar Subsystems for Missile Defense Application
Andover, Massachusetts – May 18, 2017: Mercury Systems, Inc. (NASDAQ:MRCY) today announced it received a $5.9 million order from a leading defense prime contractor to provide radar subsystems and related digital processing technologies for a missile defense application. The order was booked in the Company’s fiscal 2017 third quarter.
“For years Mercury’s best of breed technologies and rapid deployment have helped drive performance to unprecedented levels for this prime contractor’s missile defense applications,” said Didier Thibaud, Mercury’s Executive Vice President and Chief Operating Officer. “We are committed to delivering solutions that meet stringent platform requirements and provide significant affordability, portability and performance in an open architecture.”
Mercury Systems is a leading commercial provider of secure sensor and mission processing subsystems. Optimized for customer and mission success, Mercury’s solutions power a wide variety of critical defense and intelligence programs. Headquartered in Andover, Mass., Mercury is pioneering a next-generation defense electronics business model specifically designed to meet the industry’s current and emerging technology needs. –Mercury Systems
The Ripple Effect
As several of the large defense stocks hit their all-time highs, we believe that there’s a ripple effect that will/is happening through the industry, especially when hundreds of billions are involved.
Most of the large defense companies are vertically integrated. Yet, they still outsource to small and mid-sized companies for some of their components and ancillary products.
Why do they still outsource to smaller companies?
Some call it a “cultural thing” where it’s how business has always been done in the defense industry. While others refer to it as a “relationship thing” where supply-chain contracts have been in existence between large companies and small companies for generations, and the strong bonds have been built between the large and smaller companies to create their own ecosystem.
Call it what you want, but we call it an “investment opportunity thing!”
We believe that when large companies win large contracts, the contract revenue will eventually ripple through to the smaller companies.
And in looking at the Saudi Arabia deal, we see it already impacting the large defense companies.
And according to some analysts, the rise we’re seeing in some of the defense stocks in 2017 is just the beginning. Many analysts are saying that 2018 and 2019 are the years where the Saudi Arabia deal starts to really kick-in.
Because we believe that the ripple effect is real, we think it’s the right time for us to take a scan at investment opportunities in small publicly traded defense industry companies that are currently not getting much attention.
Take a Closer Look at This!
SO … we’ve gone through our investment analysis. We’ve applied our own criteria and filters. And we’ve done our homework.
Our due diligence has yielded some interesting investment opportunities. The Company our research team has discovered which stands out most and is poised to take off: Technical Communications Corporation (Nasdaq: TCCO – website)
Here’s a little summary of the company (click here to find out more about the Company):“Technical Communications Corp. is in the business of designing, developing, manufacturing, marketing and selling communication security devices, systems and services.The Company provides secure communications solutions to protect information transmitted through video, fax and voice networks. Its products are sold to governments, military agencies, telecommunications carriers, financial institutions and multinational corporations. Technical Communications was founded in 1961 and is headquartered in Concord, MA.”
What catches our attention is the company’s history in developing encryption and secure communications. And not just secure, but MILITARY GRADE communications products.
Here is summary list of why we like the company:
- 1. U.S. Based – It’s headquartered in Concord, Massachusetts – Remember that defense contracts have had a history of creating and U.S. jobs
- 2. It’s a 56+ year-old company – We’re thinking that to be around this long, it clearly has established relationships with larger defense companies to help it win contracts.
- 3. Established global customer base – This Company is not new to the “defense contracts” dance. Gov’t entities, military agencies and corporations in over 115 countries have selected its products.
- 4. Intellectual property – According to the company’s timeline, it has 17 patents and various algorithms and business milestones.
- 5. Interesting products – It specializes in providing military-grade secure communications systems and customized solutions and services that protect highly sensitive voice, data and video information transmitted over a wide range of networks.
- 6. Profitable – Yep, it’s making money. It recently announced a profitable quarter due to orders it received to ship its products for use in Afghanistan.
- 7. NASDAQ listing – It’s fully reporting.
- 8. No debt – Yes, this company has NO short/current or long-term debt.
This initial list makes the company a really interesting investment opportunity. However, here are some risk factors to consider:
- 1. Will TCCO continue to secure contracts for its products?
- 2. TCCO has shown a dependency on 3rd parties (see Datron) to help it win deals.
- 3. The company has a history of burning thru cash and was unprofitable until only until recently
- 4. The defense industry is cyclical by nature.
- 5. There are typically long sales cycles in the defense industry.
- 6. Congressional rumblings of a possible block of part/all of the defense deal.
- 7. There is always competition in defense industry because of the large contract sizes and the industry’s push for RFP’s with multiple vendors.
Although there are risks, with risk comes reward.
Here is a statement from the Company’s recent 10K filing to note of TCCO’s current deal from Datron:
“Additionally, in early fiscal 2017, the Company received an order valued at approximately $2,373,000 from Datron World Communications, Inc. for our military-grade DSP 9000 radio encryption equipment. Follow-on orders are expected as part of Datron’s five-year, $495 million Foreign Military Sales Indefinite Delivery Indefinite Quantity contract from the US Army Communications Electronic Command.”
And this additional info in its 10-K about the contract backlog:“TCC’s backlog at the end of fiscal 2016 was $313,000, as compared to $717,000 at the end of fiscal 2015. However, with the order from Datron indicated above, TCC began fiscal 2017 with a backlog of $2.7 million.”
And for you history fans, here’s an article on Seeking Alpha that gives a rundown on where the company has been, where it is today, and where it could go.
A Rising Tide Raises All Ships
So we’ve already seen some of the big defenses stocks hit all time highs as a result of the news about the big defense deal the big defense deal.
Thus, we believe that the defense industry will continue to be IN PLAY. However, some of the large defense stock prices will continue to rise with the added attention, making them VERY EXPENSIVE stocks.
We think that the small-cap companies like Technical Communications Corporation (Nasdaq: TCCO) have been overlooked.
Their products appeal to the needs of countries (and companies) that have a need to bolster their military and government agency communications with secure and encrypted products.
With their current shipments to Afghanistan, they are currently doing business in the Middle East region.
And as the ripple effect plays out, companies like Technical Communications Corporation (Nasdaq: TCCO) stand to garner favorable exposure and are nicely positioned to catch additional contracts.
…WHICH should really benefit their stock price.
…AND why you need to take a look at getting into Technical Communications Corporation (Nasdaq: TCCO) alongside us.
Historians agree… history does have a tendency to repeat itself.
So if you’re looking to get into making investments that ride the wave of defense contracts then you’ve got take a closer look at Technical Communications Corporation (Nasdaq: TCCO).
It’s really, really cheap to get in … for now.
It costs a heck of a lost less than the big defense stocks … a lot less.
It’s setting-up to make another run. Take a look at its 3-year chart and how the stock price reacted to a contract.
As you will see from recent history, Technical Communications Corporation (Nasdaq: TCCO) has traded over $5 coming off a contract announcement.
And at that time, there wasn’t any macro-news like there is today where a $110 Billion (with an additional $240 Billion over the next 10 years) defense deal will propel the defense industry and with it, have rippling effects on companies like Technical Communications Corporation (Nasdaq: TCCO).
And when you compare all of the risks against what Technical Communications Corporation (Nasdaq: TCCO) recently announced in it’s current 10-K and what the potential future holds, then it seems like it would make a whole lot of sense to get in at its current trading range of mid-2.70’s before history repeats itself, and then some.
We see a nice appreciation opportunity into double digits from these prices. Do your homework (as we have) and see if you want to build a position (like we have) in this timely investment opportunity.
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