Defense Contractors See Profits Down Under

Faced with the threat of sequestration and a generally muted government spending ability here at home, U.S. defense contractors might be well-advised to seek new revenue streams... Down Under.

Last week, the government of Australia published its defense budget (actually, they called it a "defence budget") for fiscal 2013-2014. In it, investors can find a number of items that suggest U.S. companies have significant revenue opportunities in Australia.

The big picture
Viewed in the context of the $523 billion that the U.S. Department of Defense requested as its base budget for fiscal 2013 -- or the even greater sum it's likely to spend -- Australia's 2013-2014 probably looks like small potatoes. According to the local Department of Defence, Australia has allocated $25.3 billion to defense in fiscal 2013-2014, but this number is growing. (There's very rough parity between the Australian dollar and the U.S. dollar, by the way. The exchange rate literally varies by about a couple of cents.)

In the 2016-2017 fiscal year, Australia expects to spend some $30.7 billion on defense -- a 21% increase in just three years. And the numbers get even bigger the farther out you look. In the country's "Budget Forward Estimate" for the six years running from 2017-2018 through 2022-2023, spending on defense is expected to swell to $36.7 billion annually, on average. That's a number 45% bigger than what the country plans to spend next year.

The nearer term
Defense industry investors needn't wait for 2023 to roll around to see increases in Australian defense spending, however. In fact, Australia says that by "reprofiling" its funding, it's already managed to dig up a total of $1.05 billion extra dollars (that's about $1.03 billion USD) to spend on its military over the next six years.

Who gets the loot?
Now for the big question affecting investors: Who, up here, is likely to benefit from all this spending Down Under?

With the caveat that nothing's set in stone, judging from the contents of the published budget, here are a few of the likely winners:

  • Austal (NASDAQOTH: AUTLY  ) : Partnered with General Dynamics (NYSE: GD  ) in building one version of the U.S. Littoral Combat Ship coastal warship, Austal is also the prime contractor building Australia's own Armidale-class patrol boats. Australia plans to begin early replacement of this boat class, and as the incumbent producer, Austal has to be considered the lead candidate to build the next big thing.
  • Boeing (NYSE: BA  ) : Australia has budgeted $2.9 billion to purchase a dozen new EA-18G Growler electronic warfare aircraft from Boeing, hedging against the risk that complications in the program will force Lockheed Martin (NYSE: LMT  ) to be tardy in delivering more advanced F-35 fighter jets that Australia has on order.
  • Lockheed Martin and Raytheon (NYSE: RTN  ) : Lockheed may not be totally out of luck, however. Another big-budget project in the works Down Under is a planned C-band space radar installation at the Harold E. Holt naval communication facility in Western Australia. Australia plans to jointly operate the installation with the U.S., aiming to establish a virtual space "fence" that will track debris orbiting the earth, in order to avoid mid-orbit collisions with our spacecraft. In total, this project is expected to cost upwards of $6.1 billion over its lifetime. Both Lockheed and Raytheon are bidding to help build it.
And the best part? Because the space radar installation is jointly operated by the U.S., you know Lockheed and Raytheon have a shot at aerospace contracts drawing from a budget 20 times richer than what Australia can afford to spend.

Now, you don't have to go international to find companies to invest in. In fact, profiting from our increasingly global economy can be as easy as investing in your own backyard. The Motley Fool's free report "3 American Companies Set to Dominate the World" shows you how. Click here to get your free copy before it's gone.


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