Hey! Who's Flying This Thing? Part 2

It's sad but true: You can't invest in the past. You must invest in the future.

As investors, we place a lot of faith in the past. We value companies based on their trailing-12-month profits. We sell off stocks that report disappointing earnings for the quarter just ended -- meaning the quarter in the most recent past. Why do we do it? Because there's security in the past. The past is fact. The future is uncertain, and our crystal balls are cracked.

Yet the fact remains: All of your profits will be earned in the future. But how can you hope to figure out what the future might hold?

Crystal Ball 2.0
You look for positive inventory divergence. You track backlog. And in the simplest exercise in soothsaying ... you read the newspaper.

One month ago, when doing just that, I hit upon an Associated Press story describing the Pentagon's plans to invest heavily in unmanned warfare -- specifically, unmanned aerial vehicles (UAVs). In a column bearing a title strikingly similar to the one you see above, I described a dramatic rise in the U.S. military's use of UAVs in the Iraq and Afghanistan theaters. The more I look at this trend, the more I think it's one of several waves of the future in defense spending.

So I hereby declare my intention to follow major developments in this story closely. Today, and in the future, you can find them easily in columns with the above title, parts 2 through infinity.

Part 2
In today's column, we turn once again to the AP, which cites "military officials and budget documents" in describing a surge in military appropriations for UAV purchases and research in 2009. According to the AP, we're looking at potentially $3.9 billion in military UAV spending in the coming year, a 70% year-over-year increase.

As you may recall from my January column, the AP had quoted a U.S. Army spokesman predicting that "deployment of the unmanned systems will not go down, particularly for larger systems." Turns out that call was right on the money. The Pentagon's 2009 proposed budget leans heavily toward spending on a few large, expensive, mostly lethal UAV systems, with much smaller amounts going to the makers of smaller UAVs. Here's what we know:

  • Northrop Grumman (NYSE: NOC  ) comes away the big winner in next year's appropriations request. The Air Force wants to purchase five of the company's Global Hawk surveillance planes for a total sticker price of $1 billion.
  • But that's not all. In addition to filling up the shopping cart, the military is also anteing up for further research and development in the UAV arena. Notably, the Navy wants $800 million allocated to research UAVs -- specifically, UAVs with the ability to take off and land vertically. Sounds to me like the Navy is talking about Northrop's Fire Scout mini-helicopter.
  • Privately owned General Atomics is next in line at the trough. Combined, the Army and Air Force request $800 million to purchase five dozen or so Predator, Reaper, and Warrior UAVs. (Reapers and Warriors are being updated, and more lethal revisions are being made to the original Predator model.) Winners by extension, but to a lesser extent, are Honeywell (NYSE: HON  ) , which builds the Predator's turboprop engine, and Lockheed Martin (NYSE: LMT  ) and Raytheon (NYSE: RTN  ) , which manufacture the rockets and laser-guided bombs that these birds carry.
  • Textron (NYSE: TXT  ) is getting quick payback on its recently purchased United Industrial, with the Marines asking for $20 million to purchase four Shadow UAVs.
  • And tiny AeroVironment (Nasdaq: AVAV  ) also gets some business for its even tinier (and cheaper) Raven UAV offering. The Army is buying these flying widgets in bulk. It wants $30 million to purchase 168 Raven systems from AV -- more than 500 remote-controlled model airplanes in all.
  • Left unmentioned in the AP piece are jumbo-plane maker Boeing (NYSE: BA  ) and its ScanEagl mini-UAV, and the L-3 communications system that's supposed to keep all of these robotic planes talking to each other -- and to their controllers. But $4 billion is a big pot. Don't be surprised if they manage to work a ladle in, too.

Foolish takeaway
None of the above numbers are yet set in stone. Remember, this is just a request for Congress to fund the systems that the military says it needs. Not everything will get funded to the full extent. Conversely, there's always the possibility that some numbers will get bumped up. Just last week, for example, the Army exercised a contract option to order another $46 million worth of Ravens from AeroVironment -- and that right there is 50% more than all of the Ravens planned to be purchased next year.

But while the exact numbers may shift around a bit, one thing's for sure: The military is getting mighty serious about bulking up its robotic air force, and there's money to be made here in the future -- for the contractors, and for their shareholders.

Believe it or not, the Fool is your source for all things investing and defense investing. See:


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