The United States would have to spend $494 billion over the next decade to enact its plan to modernize its nuclear arsenal, a figure that highlights the opportunity before contractors as the Pentagon seeks ways to pay for one of its top priorities. The total, which comes from a biannual report put out by the Congressional Budget Office (CBO), is 23% higher than the $400 billion price tag in the 2017 estimate. It comes at a delicate time for the Pentagon, which, after enjoying two years of steady budget increases, is facing a much less certain fiscal 2020 allocation.
But while it might be difficult for defense officials to quickly secure that full amount from Congress, the CBO does lay out an urgent case for investment. The nation's current nuclear force, which includes missile-launching submarines, land-based missiles, bombers, and warheads, "are reaching the end of their service life," the report concludes. "Over the next two decades, essentially all of those components of nuclear forces will have to be refurbished or replaced with new systems if the United States is to continue fielding those capabilities."
Here's who stands to benefit from the push to renew the nuclear triad.
Nearly half of the total estimate is earmarked for "strategic nuclear delivery systems," or the planes, ships, and rockets needed to launch nuclear payloads and deliver them to their targets. The military for now mostly relies on Cold War-era equipment, though plans to modernize the triad are already in place.
Northrop Grumman (NYSE:NOC) in late 2015 beat a team including Boeing (NYSE:BA) and Lockheed Martin to design and build a new long-range bomber. The Pentagon is expected to purchase at least 100 aircraft, with deliveries expected to begin in the mid-2020s and extend for a decade.
The plane, now known as the B-21, has been a near-casualty of Congressional budget battles in recent years, but the Pentagon continues to spend upwards of $2 billion per year on development. Overall, the CBO expects the Pentagon to spend $49 billion on bomber acquisition between now and 2028, which would easily make the B-21 Northrop's most important platform.
Critics of the new bomber remain, citing its massive costs and limited usefulness in a world where major powers are growing better at detecting and countering stealth. Eventually, space-based systems could fill some of the role currently played by bombers, as well. But at best, the debate over the B-21 is going to come down to squabbles about how many are produced and not the fate of the plane -- meaning this is likely to be a long-term winner for Northrop.
America's most important deterrent
The Columbia-class submarine, designed to take over for the Ohio-class ballistic missile sub and house the nation's stockpile of Trident sub-launched ballistic missiles, features a stealth electric drive propulsion system and improved maneuverability. The sub, to be built by General Dynamics' (NYSE:GD) Electric Boat subsidiary with support from Huntington Ingalls (NYSE:HII), is due to be operational by 2028 to ensure second-strike capability should the U.S. be hit by a catastrophic attack.
While some have questioned the need for a full fleet of bombers, there are few critics who would question the need for subs. The second-strike option is not an appealing scenario, but military planners believe the ability of the U.S. to respond, even if the nation is devastated by a surprise attack, is key to the strategy of deterrence.
For now, 12 subs are planned at a CBO-projected cost of $107 billion over the next 10 years. Some critics, most notably the Federation of American Scientists, have suggested fewer are needed, thanks to a need for fewer deterrent patrols compared to during the height of the Cold War, but the Pentagon of late has suggested that 12 is a minimum and further Columbia-class boats could be needed.
The CBO acknowledged the talk of extending the line past 12 boats but predicted any additional orders would not be funded until after the current 10-year window has closed. Regardless, this is a long-term winner for General Dynamics that should contribute to earnings into the 2030s.
A new rocket competition
The only major piece of the triad renewal still up for grabs is the task of replacing the nation's arsenal of intercontinental ballistic missiles. Boeing's Minuteman is the only U.S. ICBM currently operational, but the government is working to pick a replacement in hopes of having it in service by 2027.
In August 2017, the Air Force awarded Boeing and Northrop Grumman $349 million and $329 million, respectively, to develop competing new designs, with a goal of selecting a winner next year. The government is expected to spend more than $60 billion on ICBMs over the next decade, meaning the award would be a needle-mover for the eventual winner.
The stakes are also high for the two potential manufacturers of the solid-propellant rocket engines that will be used to power the missiles. Northrop brought one of the two contenders in-house last year with its $9.2 billion deal for Orbital ATK. The other, Aerojet Rocketdyne (NYSE:AJRD), has warned the Air Force and lawmakers it needs to win at least part of this procurement to remain a viable supplier.
Given the Pentagon's priority to nurture a healthy and competitive supply base, it would not be a surprise to see both Aerojet and the former Orbital business split the ICBM engine award.
How to invest
The CBO report is a 10-year spending roadmap and not the kind of document you would expect to move markets overnight. But for long-term investors who have seen defense holdings battered by near-term budget concerns, the longer timeline should provide some peace of mind.
It's impossible to say what the exact Pentagon budget number will be for fiscal 2020 or to know exactly how much of that $494 billion estimate for nuclear modernization will be allocated over the next 10 years. But as the CBO notes, this program is both a massive expense and a top priority. It's a safe bet that these large nuclear programs will not disappear.
The CBO report gives investors in defense stocks the rare luxury of being able to look out well into the future and know where revenue will be coming from for years to come. Amid the chaos of Washington's budget battles, it's important to remember that the long-term outlook for defense titans is strong.