In a series of tweets, Trump took aim at the two biggest players in the U.S. defense industry last week. First, Trump blasted Boeing's contract to build a pair of new Air Force One jets for the White House, painting it as a $4 billion boondoggle and demanding that the Air Force "Cancel order!" The president-elect later explained, "We want Boeing to make a lot of money, but not that much money."
A few days later, Trump unleashed a similar tweet storm against Lockheed Martin, decrying the company's trillion-dollar-plus F-35 stealth fighter program as "out of control." (Lockheed Martin investors will recall that we warned you about that one -- Trump has been criticizing the F-35 all year long.) On the plus side, Trump didn't specifically call for canceling the F-35 program, as he did for Air Force One. However, the president-elect did make the ominous observation that "billions of dollars can be saved on military (and other) purchases after Jan. 20."
So, what does all of this mean for investors?
How investors are reacting
For their part, Boeing investors don't seem to be reacting at all. Since Trump's attack on the Air Force One program's costs, for example, Boeing shares have actually gained 1.4% in price. The reaction at Lockheed Martin, on the other hand, has been a bit more severe.
Since the Dec. 6 attack on Boeing stock foreshadowed potential broader salvos fired at the defense industry in general, Lockheed Martin shares have actually sold off by 5.5%. The Lockheed-specific tweets that emerged on Monday contributed less than 1% to that sell-off, which tells us that investors had already buckled themselves in to prepare for the coming tweet storm.
Are they right?
Both reactions make a lot of sense. In the case of Boeing, we're talking about a $95 billion-a-year business here. Even if the Air Force One contract were to be valued at $4 billion (many experts dispute that figure), it would only represent, at most, a couple of weeks of revenue for the aerospace giant being put at risk.
Lockheed Martin's F-35, though, is a warhorse of a different color. Already, Lockheed Martin depends on the F-35 fighter jet to provide 21% of its $50 billion in annual revenue. Over time, as the program matures into full-rate production and begins pumping out hundreds of aircraft a year, we believe the F-35 could grow to account for fully 50% of Lockheed Martin's business. Donald Trump's attack on the F-35 program, therefore, poses an existential threat to Lockheed Martin -- a threat much more severe than the attack on Boeing's tiny 747 production line.
Reading between the lines
What's more, there's a subtext to what Trump is saying here that could actually turn out to be good news for Boeing. Military experts tell us that there's as much as a 100-airplane gap between the number of airplanes the Pentagon needs to fulfill its mission and the number of airplanes it actually has on hand. That's a gap that's expected to grow as older planes retire, requiring newer planes to replace them.
Currently, Lockheed Martin's F-35 is the plane expected to fill America's fighter jet gap. But if the F-35 program gets canceled -- or even curtailed in size -- that means the Air Force, Navy, and Marine Corps will need to buy other fighter jets to fill the gap. For Boeing, which makes F-15 fighters for the Air Force and F/A-18s for the Navy and Marines, a threat to Lockheed Martin's F-35 program could actually be good news -- promising a new lease on life for Boeing's defense business.