A deep dive into the U.S. defense industry, including how recent Washington budget battles are shaping the outlook for contractors, and a tour of some of the Pentagon's big-budget spending priorities.

Motley Fool's host Nick Sciple and Fool.com contributor Lou Whiteman discuss the outlook for the defense industry, including factors that should excite, and worry, investors.

A full transcript follows the video.

Check out the latest earnings call transcripts for companies we cover.

10 stocks we like better than Walmart
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, the Motley Fool Stock Advisor, has tripled the market.* 

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Walmart wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 14, 2018
The author(s) may have a position in any stocks mentioned.


This video was recorded on Jan. 31, 2019.

Nick Sciple: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, January 31, and we're talking about the defense industry. I'm your host, Nick Sciple, and today I'm joined by Motley Fool contributor Lou Whiteman via Skype. How's it going, Lou?

Lou Whiteman: I'm doing well! How are you? 

Sciple: I'm doing great! We've got the polar vortex coming through, single-digit windchills here in the D.C. area. Being from Alabama, it's been a little bit of an adjustment, but we're making it through. How are you doing in your neck of the woods? 

Whiteman: We are 33 degrees. I just looked out the window, we're 33 degrees in Atlanta, which I guess sounds pretty warm compared to up there, but I'm sick of it. I'm ready for spring.

Sciple: Yeah, tell me about it. I'm ready for shorts weather coming back through. 

Today, we're talking about the defense industry. We're going to talk about several different things. We're going to talk about what's been going on with the government shutdown, and we're going to talk about what the government has been talking about when it comes to the needs of the military into the future. But first, Lou, before we dive too deep into that, I want you to talk about, how significant is the government as a customer for these defense contractors? How important is what's going on in Washington, D.C., to their bottom line?

Whiteman: This is the trade-off of this industry. The good news is, you have a customer who, so far, for 200 years in, has been able to pay its bills, and it's pretty reliable on that. However, you are reliant on that one customer, and increasingly in recent years, there has been erratic behavior with that customer. In this case, the Pentagon was not shut down, which certainly helps these defense contractors, but they do a lot more than just serve the Pentagon. They do a lot of the IT work for different agencies that were shut down. They do a lot of work for NASA and Homeland Security, who were involved in the shutdown. So, yeah, this adds a huge layer of uncertainty to a business that is, as you say, very reliant on that one customer.

Sciple: Just to give you some numbers on the shutdown, obviously it was the longest one in history at 35 days, and we're still not 100% sure whether it's over for good. We've got this continuing resolution in place that's going to keep the government temporarily open until February 15, but there could be another shoe to drop. Definitely some uncertainty for these defense contractors.

One way that these defense companies were impacted during the shutdown was the ability to follow through on some foreign arms sales that had been taking place recently because the Department of State and Department of Commerce were both shut down. Can you talk about the effects of that on some of the defense contractors in the U.S.? 

Whiteman: Sure. As you say, for all these foreign sales, there's a few different programs that we do foreign sales. Some through the State Department, and some just need approval from Commerce. But they do need to be rubber-stamped. Sometimes, it can be controversial.

International sales are a big push of this administration, and are expected to grow. It was over $55 billion last year. They're hoping for more this year. This is a significant chunk of revenue that did shut down. The good news is, it was early in the quarter. We're mostly talking about the first quarter of 2019. There's a lot of time to play catch-up. The State Department officials really believe that it won't mess up the year. It could have a small effect in the first quarter of 2019, but hopefully, they're back at work. Most of what was in the pipeline was pretty noncontroversial, so it should be a matter of just getting it out the door. But that's certainly a huge risk, more for the first quarter of 2019, but a huge risk for these companies and their numbers. 

Sciple: Sure. Outside of the foreign arms sales, were there any companies in particular that may have been more affected by the shutdown than others? How did those chips fall across the industry and the companies that operate in it?

Whiteman: Fortunately for the big guys, they're big companies. Again, this is mostly a first quarter 2019, early in the quarter, so there's a lot of time for reimbursement, a lot of time to catch up. One company that it feels like could be impacted more than others is SAIC, which is a government services contractor. They do a lot of IT work. They do a lot of work with systems, they have a lot of work with NASA. They're unfortunately on a calendar that their quarter ends January 31. So, they're both a smaller-revenue company, so any hit is going to be felt disproportionately, and, in the current quarter, it's all going to be soaked up. They've been pretty public warning Wall Street that there could be an impact to the current quarter, which makes me think that it is a concern. There was a number, it's a few weeks old now, but on January 7, they met with investors and said it was a $50 million impact so far, plus maybe about $10 million in employee compensation for work being not done that's going to have to be, hopefully, reimbursed. It's a company with a little over a billion dollars in revenue expected in the quarter. With how long the shutdown went, it definitely could take a toll on their eventual quarter that ends at the end of the month.

Sciple: That will be our first look at how any of these companies was affected by the shutdown. We had a lot of defense contractors reporting earnings in this past week. Lockheed Martin (LMT 0.52%), General Dynamics (GD 0.52%), Raytheon (RTN), Northrop (NOC 1.30%). Of course, those numbers are not embracing a significant chunk of the government shutdown. However, they did give relatively muted guidance looking out into next year. Can you talk about that a little bit? 

Whiteman: Sure. Yeah, this is earnings weeks for these companies, so we're just digesting them now. All of the big four -- Lockheed, Northrop, General Dynamics, and Raytheon -- have surprised me, and I think surprised the markets, with their conservative guidance. A lot of what you're seeing is uncertainty about when some of these big, long, multiyear items are going to actually get paid, and how quickly things will happen. 

Lockheed Martin took the step of adding impact of government shutdown to their forward-looking statements as a possible thing that could go wrong. As far as I know, that's brand-new. That wasn't there before. They're the biggest defense contractor in the world, and even at their scale, this is something that they're thinking of, something that they're factoring into what could go wrong for them, especially given the budget negotiations that are coming up on the horizon.

Sciple: Let's talk about that a little bit. With this shutdown lasting for as long as it has, it really highlights the divisions between the two parties in Congress and this inability to come to an agreement. When you look at the 2020 budget, those two groups reaching an agreement as to how much money we're going to spend on defense and the rest of the government is really important to the thesis for these defense contractors. Can you talk about the uncertainty of what we're looking at into the 2020 budget, and how we should think about that as investors?

Whiteman: Yeah, very much so, this is something investors have to be watching. To give you a quick history, right now, we're still working under the Budget Control Act of 2011. If you remember back to the previous administration, we had a split government, and they weren't doing a great job of coming to an agreement on things like budgets. Lawmakers passed a law basically saying, "If you can't compromise, then on both the defense and the civil side, there's going to be sequestration," which was a massive, across-the-board cut. That actually went into effect. It was not enough of a threat to force them to compromise. Defense stocks were hit pretty hard during that time.

With the new administration, we had a couple of years of unified government. We had a two-year budget deal that included Pentagon funding. That's why they weren't part of the shutdown. A lot of people don't realize, that was only a two-year deal. We're coming up now on fiscal 2020. Without a new compromise, we're going to revert back to those sequestration levels. I've seen estimates all across the board, and there's a lot of accounting tricks you can do, but this could cost the Pentagon upwards of $100 billion in spending per year. They can't stop paying the troops, so a lot of that is going to be deferred procurement or deferred modernization of IT.

This recent shutdown was the appetizer to the main course, which is that 2020 budget. Seeing how that played out, it's really hard to have a lot of optimism right now that the budgeting process will go smoothly. Hopefully, they can eventually get something done. I'm not predicting we're going to return to sequestration, but it's a huge risk. It's something you have to be watching. Long-term, I think the companies will be fine. Long-term, as we'll talk about later, there are a lot of things that need to be done, a lot of spending that needs to be done. But this could certainly impact 2019 spending. It could certainly even go into 2020 if the deal is reached late, if there's uncertainty, or if they kick the can and projects have to be delayed.

Sciple: If we go into sequestration, what kind of adjustments might these big contractors have to make to their operations to absorb that and wait out the low times until we can reach another consensus in Congress?

Whiteman: How they modeled it last time -- and unfortunately, they have recent history here -- a lot of the big needle-moving projects for these companies, they're not going to disappear. We're not going to stop buying aircraft carriers, we're not going to stop buying F-35s. They can sort of proceed as business as usual, although they might have to slow the scale or slow productivity. For near-term results, for quarterly results, it creates ugly comparisons, and it definitely slows the business down. You have to be a long-term investor to weather that storm. What we learned last time, and I think we'll learn this time, is that in the end, there will be a resolution. But really, what we saw is these companies that just did what they could on the expense side and slowed production to levels that they thought the government was going to order. 

The real companies that got hit are, we like to call them the Beltway bandits, the government IT companies that are increasingly important. A lot of the IT is being outsourced by the government. Those projects are the ones that were really easy to bring to a halt. I would anticipate those companies -- SAIC being one, Leidos (LDOS 1.05%) is a huge one -- those are the companies that are going to be the hardest-hit if we do indeed hit sequestration again. 

Sciple: Something to watch for investors. Lou, you mentioned the long term. Let's talk about the long term and where the bull case might be on a lot of these defense contractors. There's going to have to be a lot of spending when it comes to our arsenal in the future. There are two things we want to talk about -- investment in the nuclear triad, really bringing that up to modernity, as well as, later in the show, we'll talk about the new Missile Defense Review that came back in January. 

When it comes to our nuclear arsenal, it's really reaching the end of its useful life. We're going to have to put some serious investment in to bring those resources up to date. What can you say about what needs to be done when it comes to our nuclear arsenal? How much money is going to need to be pumped into those resources?

Whiteman: The big overriding themes -- and this applies here, and it applies, as we'll talk about later, to things we all know. The world is not getting safer. It's a dangerous place, and we do need weaponry. The second part is, we're now paying the price for the so-called Cold War dividend. When the Cold War ended, the United States was the only superpower. Not that the Pentagon spending went away, but we did go into a lull. And we're now using Cold War-era technology, competing with, in theory, a resurgent Russia, a resurgent China. And, yes, that means spending, that means modernization. 

The CBO [Congressional Budget Office] just updated a study on the triad. They determined almost $500 billion, $494 billion, needs to be spent in the next 10 years on nuclear triad modernization. That's up considerably, 20% or more, from their 2017 estimate. Part of that is, we have a road map for some of this spending. Part of it is, now, we're getting into the years where, hopefully, those investments will be made. So some of that increase was expected. But it's a massive amount, half a trillion is going to go into new bombers, new subs, new rockets, new warheads to put on them, plus all the support. It's a huge area. The details, some of them have to be worked out, but it's almost guaranteed revenue for some of these companies, the lucky winners of these, because it's a huge priority for the United States. 

Sciple: Lou, you alluded to this, and I should have asked you this off the top -- for our listeners who may not be familiar, can you talk about what the nuclear triad is? What does it mean when we say the nuclear triad? 

Whiteman: Sure. There's three ways that we deliver nuclear weapons. We have our missiles, we have bombers, and then we have our submarines, which is perhaps the most important, because that's the deterrent. It's a grim Cold War tale, but the idea was, we needed to be able to launch, and we also needed to be ready for the event that we were surprised. And even if the homeland was decimated, if there's a submarine out there that can quickly respond, that's the best deterrent against launching into the United States. 

It's the formula that's still in place. There's some debate about some parts of it, but this is how we defend the country. This is how we think of nuclear weapons. And all of our equipment is getting old. It's time for renewal. These are big-ticket items, unfortunately for the United States' spending. 

Sciple: Let's talk about some of these items. Northrop Grumman is developing a new bomber, the B-21. The number that I saw is, between now and 2028, the Pentagon is expected to spend $49 billion on that program. Can you talk about the significance of that aircraft for Northrop Grumman, as well as for our defense arsenal as a country? 

Whiteman: That's the keystone project for Northrop Grumman. They won that bomber. It's been a slow road. Of all the parts of the triad, that's probably the most controversial simply because, even though it's stealth, with technology, it's increasingly hard to get a bomber in place over an enemy in a war zone. 

This is a huge expense. They're doing their best to modernize it. It's replacing an aircraft that isn't that old, the stealth bomber from our youth, in part because there's a feeling they did not forward-proof that enough. The downside is, they are trying to forward-proof this one, but it's incredibly expensive. This is a plane that's going to be a significant portion of Northrop Grumman's revenue for the years to come. There's a set number in place. The Air Force, if anything, says we need more of those. The Air Force is trying to expand its fleet in both attackers and bombers. There's no way this is going to be cut completely. 

There is a little bit of long-term risk to Northrop, though, if this project will ever be what they hope it will be, which is over $50 billion, a monster that's a huge portion of the revenue well into the next decade.

Sciple: Let's talk about another monster program, and that's the new submarines that are being developed currently, the Columbia-class sub under development. The numbers I saw there is that there are 12 subs planned at a cost of $107 billion over the next 10 years. Again, same as for the bomber, can you talk about the importance of that program both for the defense contractors who are developing it as well as for our defense capabilities?

Whiteman: Naval is a big part of the bull story on General Dynamics. They're not as exposed to some of this aerospace, and they're not as big on space as some of the other contractors. They have a lot of Army land gear, which, while modernizing, isn't as sexy and doesn't tend to be as big-ticket as the submarines or aircraft. 

This is out of General Dynamics' Electric Boat subsidiary. They're working with Huntington Ingalls. That's our nuclear carrier contractor. They'll get some revenue here, too. This is a boat that, as I said, is designed to be the deterrent. This the reason why a foreign power does not want to attack the United States. Even if they work, even if they get the sneak on us, there are these state-of-the-art submarines out there with brand-new warheads that can fire back. There is, again, some debate over how many we need. A lot of the numbers, the dozen or so, is based on Cold War planning. These are better submarines. However, you do want them patrolling the whole ocean. I would be shocked if we don't get a full allotment of this. 

General Dynamics has had a lot of things going not their way in recent years. Columbia-class is early. It's not really a contributor to earnings right now. But, again, if you look out a few years, one of the reasons why General Dynamics works as an investment is that the Columbia-class, as it matures, is going to see margins. It's a priority, we're not going to see it cut back, and there's pretty reliable revenue streams out of that going out a long time. In the investing world, you don't get that with many sectors. 

Sciple: You said full set. When we're talking about that, how big or small is that relative to the dozen that we're talking about?

Whiteman: Oh, I meant the dozen. Some of the Navy would like to see more. I'd be surprised with that. There's an outside chance you might see that shaved, but that would be in the out year of this decade we're talking about. If there's risk to that program, you have to go out nearly a decade to find it. I think that's a pretty reliable program for General Dynamics, as far as we can reasonably look out.

Sciple: Sure. To close out the triangle of the nuclear triad, let's talk about what is being developed when it comes to our missile capabilities. Currently, Boeing's (BA -0.33%) Minuteman is the only operational ICBM [intercontinental ballistic missile] in the arsenal. There's a priority to come up with a new delivery vehicle, or at least new options for how we can deliver our warheads. Can you talk about what's going on when it comes to that program, and what companies are involved?

Whiteman: Sure. The Minuteman, it's been modernized, but this is, again, a 1960s rocket that we're using. Due to treaties and due to cost cuts, we used to have a number of ICBMs; now we don't. The Minuteman is our go-to rocket. It needs to be replaced. That's the only part of this triad that we don't know who the eventual winner is. It's going to be a big deal for either Northrop or Boeing. Right now, Northrop and Boeing each have about $300 million to develop their model. It's going to be an old-fashioned bake-off for a very large deal. Northrop spent $10 billion to buy Orbital Sciences in part for this in particular. There's a lot that they'd like to do in space, and space is definitely an area that they think they're going to see growth in. 

But the Minuteman, the ability to offer the whole package, for Northrop, which doesn't have Boeing's commercial exposure and which does have some programs -- it does have the B-21 -- this would be a very big win for Northrop. This almost would justify the Orbital Sciences deal or not. They want it. Boeing definitely wants it, too. It's going to be very interesting. It's not going to come this year, but it's going to be very interesting to watch this. You don't get this big of a contract coming up very often, and we don't have a lot of them on the horizon right now.

Sciple: Across this nuclear triad, the takeaway for investors is, there's a lot of money on the table up for grabs. It's something that's key to our defense arsenal coming into the future, so we're going to have to spend the money on it sooner or later. Definitely going to be a bullish sign for these defense contractors going forward. 

Whiteman: Exactly right. You can maybe wonder about individual quarters and exact timing, but over the long haul, if you're a long-term investor, this is pretty close to guaranteed, that these programs are going to be invested in, and this is revenue that's going to be coming in.

Sciple: OK, Lou, let's talk about the Missile Defense Review that I mentioned earlier. It came out on January 17. It's focused on improving the United States' ability to defend against missile attacks. Sometimes they say defense is the best offense. Maybe that's what we're thinking about from our military perspective today. Can you talk about what was on that wish list, when it comes to the new Missile Defense Review, and break that down for us a little bit? 

Whiteman: Sure. This is part of a change in focus at the Pentagon. We spent a lot of time focused on fighting insurgents mostly in the Middle East. There's a renewed focus on major-power conflict, as they call it, which sounds lovely, I know. Part of this is looking at where Russia and China are today, and how we stack up. One area, hypersonics, missiles that travel five times the speed of sound. Arguably, Russia is ahead of us. Arguably, China might even be ahead of us. These are missiles that our current defenses can't even begin to deal with. We need to change that. We also need our own offerings. We are behind in having our own offering to counter that. 

This an area where we are already seeing Pentagon spending. This an area where Lockheed Martin really stands out. They won $1.4 billion in contracts last year, one of them, the Pentagon in their notes justifying that contract said, "No other contractor has this level of design maturity," and talked about hundreds of millions of dollars in redundant costs if they went with anyone other than Lockheed Martin, just to get that other contractor up to speed. 

This isn't going to be a $50 billion area like the bomber, but this is an area where you're going to see a lot of R&D. The contractors love the R&D because it ends up in other places, the famous Lockheed Skunk Works, things like that. This is an area that's really going to fuel the R&D inside of Lockheed and inside some of these contractors for years to come.

Another area is Missile Defense. The THAAD system is another Lockheed system. The Aegis Combat System is the computers that run it, that's another Lockheed system. Raytheon, with its Radar and with its Patriot. Raytheon has the radars that run to THAAD. It has its Patriot missiles. These are all good systems. THAAD has been in the news a lot because it's our primary deterrent to North Korea. But none of them are ready for a hypersonic world. We have got to figure that out. The most likely cost-efficient way is to pay these contractors to make the existing systems better. That is, again, a huge opportunity for Lockheed, and a huge opportunity for Raytheon.

Sciple: Yeah, the significance of these hypersonic weapons, and that they're too fast for our defense capabilities to stop them, it's really something that's important for us to defend against and to have in our offering. 

Another thing on the wish list when it comes to our Missile Defense repertoire takes place in space. We're seeing initiatives to install more sensors in space to be able to track missiles and weapons as they travel in that arena. Can you talk a little bit about what the Pentagon is asking for when it comes to space, and what we're doing there?

Whiteman: Sure. I should say, this is perhaps the most interesting part of the conversation; however, it's probably the least certain. I said before that the submarines are going to get bought, the bombers are going to get bought. A lot of the Missile Defense space right now, it's, in some cases, discussing technologies that haven't yet been invented, or at least improved to the point where they could actually be put in place. There are things that are going to get spent. You mentioned sensors. We need to be able to know the second a launch happens that it happened anywhere in the world. That's increasingly difficult in the world of modern rockets. The Congress has authorized Pentagon to spend the money to figure out how to solve this problem. It could be new military-grade satellites. It could be attachments to commercial satellites. I think the most likely option is a massive fleet of small satellites that can blanket the whole world. 

A lot of this classified. We don't know where it is. We don't know how close it is. We may not even really get a clear picture of what they eventually choose to do. One company I'd look at, though, it's a very under-the-radar defense company, Harris Corporation, which does defense electronics and sensors. Their CEO on the conference call mentioned the potential for a massive new constellation of classified small satellites on the horizon as a real chance for the company to grow. I'm pretty sure he was talking about this space sensor layer. It could be an indication of where he hopes the Pentagon goes, it could be an indication of where he's been led to think the Pentagon is going to go. Harris, Boeing, Raytheon, Northrop -- all these companies will definitely benefit from that.

Sciple: It appears that space is becoming a more and more significant part of our defense initiatives. You had the Space Force announcement a few months ago from the president. Part of this Missile Defense Initiative has to do with being able to actually shoot down missiles in space. Folks who have been around for a while might remember the Reagan "Star Wars" program back in the '80s, and the shopping list has not changed in 30 years. Can you talk a little bit about what we're looking to attempt to do, probably over the long term, when it comes to satellites intercepting missiles in space?

Whiteman: You're right, this is Star Wars all over again. The concept is the same. We've progressed a lot technologically since the Reagan years. It's technically feasible, but that doesn't mean it's likely. It's still very hard. What we're talking about here is the ability to shoot an ICBM down. You have to do that right at the launch phase to really be successful. Now, to do that, you only have a window of maybe seconds. To be able to have something in space capable of detecting and launching within seconds, we need to have these satellites everywhere, including lots of satellites over enemy territory. 

The logistics, if you're talking about a rocket shooting through the atmosphere and getting to the launch phase to detect and do it, maybe thousands of these armed satellites in space to make this possible. Again, technically, can we do it? Can we shoot down a rocket? Yes. That's what the Patriot's been doing. That's what the THAAD's been doing. There's a new Raytheon system that does it. All of these, from the ground. But having them in place so it's an effective weapon or effective defense, that's a really, really complicated and really, really expensive proposition, especially since right now, we're only targeting these at about 50%, so you need some redundancy built in there, which just means all the more rockets.

Sciple: It sounds like a very difficult engineering problem to even make that happen. We talk about the difficulty of hitting a rocket with another rocket, the math to make that work is difficult. Another development we're seeing, though, is that over the longer term, maybe we don't have to have a rocket, we may be able to use a directed-energy [weapon] or a laser or something like that to intercept it. You get the advantage of, it travels at the speed of light. For these hypersonic, extremely fast weapons, it doesn't matter because you're never going to go faster than the light that we're shooting at that. 

Can you talk about the challenges behind that program, both in space, of course, but also a ground-based missile intercept program that operates through a laser delivery?

Whiteman: You're absolutely right. In theory, laser is the solution to a lot of our problems. It's easier to rearm in space, it's much faster. Again, when you're talking about a matter of seconds to get something fired, a laser makes a lot of sense. Unfortunately, easier said than done. If you have the laser in space, it needs a certain amount of energy just to penetrate our atmosphere. If you think about the energy that's already required just to do damage and halt an ICBM, you're talking about an incredibly powerful laser up in space. Are we capable of it? Yes. But the battery requirements, the recharging requirements, it's going to be a huge satellite that, in theory, could be pretty easily targeted itself. The laser helps with timing, but it doesn't mean we just stick one over the United States and that's fine. You may not need thousands, but you need hundreds of very, very expensive, very complex, and somewhat vulnerable satellites out there to make it work. 

It's not reasonable that we're going to see this now. Again, technically, is it possible? Yes. Could we demonstrate it? Yes. But are we going to build a fleet of these that could effectively protect our country anytime soon? That's hard to imagine. At best, from the contractor's perspective, this is intriguing enough that there's going to be R&D. The Defense Department is spreading money around quite a bit in relatively modest amounts just to work on advancing this. But it's an incredibly difficult problem to solve with the battery capacity, the recharging, and just dealing with things in space. We're not ready to solve it. It's still in the drawing board. 

Sciple: Definitely something to watch as we look out over the long term. We talked last week about batteries. This is another instance where battery technology is going to be really important, even touching the defense space.

Whiteman: The bigger-picture thing, too, that we have to consider as we're doing this, is there is a moral dilemma of what we're talking about here -- pretty automated systems in space with lethal weapons. By default, we have to let them work on their own. There is not time for a human to analyze the data, say, "Yes, this indeed a launch. Fire." We have got to get these systems to a point where they can reliably say, "Yes, this an ICBM with dangerous intentions, and it needs to be taken out." There's a real risk that if something goes wrong, there's a laser or a rocket up in space that's going to be launching an attack on a foreign nation when they're just putting up a weather satellite. Hopefully that wouldn't happen. That's an extreme example. But there's a lot to grapple with as we do this. 

Like I said, this is very neat. It's going to be R&D. It's going to be talked about for years to come. I would not invest on this now, though, thinking that this is going to happen within a reasonable time period. 

Sciple: Yeah. Everybody knows about the hype cycle. When it comes to these directed-energy and laser technologies, it's very exciting, the promise, what we can see in the future; but the capabilities to actually carry that out at scale, we're going to need to see some additional R&D before those can really move up.

One last thing I want to mention when it comes to the Missile Defense program, you mentioned this in one of the articles that I read on Fool.com recently, is there new opportunities for these aerospace companies when it comes to Missile Defense; however, some shipbuilders may be impacted as we shift how we structure our Missile Defense resources. Can you talk a little bit about what trickle-down impact that may have outside of the missile industry?

Whiteman: All of our branches of government, as is normally the case, make a case for why they need investment, why they need to expand. I think the Navy's case was the best. The Navy is worn down. The president ran on the idea of a 355-ship fleet -- which would be pretty substantial, we're under 300 right now -- in part because the Navy's role is so vast and its territory is so vast. One of the Navy's important jobs right now is, their destroyers are out on most of the Pacific, but all over the world. They're our eyes and ears for Missile Defense right now. The Aegis System that's on our destroyers is our primary detection system for a lethal threat. Hopefully with these new sensors, and hopefully with this new push to get better at missile detection, the destroyers won't be needed. We're talking years down the line, but the number of missions that these destroyers will have to do for missile deterrence will decrease.

In theory, that should ease the burden on the Navy and perhaps let them get by with fewer ships. Everything we're talking about is so expensive, and we're in a time of budget battles. It's going to be natural to look for ways to reduce overall spending in the next five, 10 years. I think a decent case could be made by lawmakers that, look, as we improve other forms of Missile Defense, we can take this burden off the Navy, maybe we don't need that 355-ship fleet, maybe we don't need to support all of the sailors and all of the support staff that goes with that, which is a huge budget-buster. 

The Navy is still growing. The Navy is going to modernize. General Dynamics and Huntington Ingalls are the two contractors most tied to the Navy. This isn't a reason to sell them, but it's certainly something that investors should watch. I think a reasonable case can be made that maybe, the Navy will be able to get by with less with all these other developments going on.

Sciple: Sure. Something to watch for investors, particularly those invested in General Dynamics and Huntington Ingalls. 

Before we go away, we've given a good overview of what's impacting these defense contractors on the short term when it comes to the budget, as well as the opportunities over the long term with these new weapon-delivery vehicles. As you look out into the defense industry today, which company or companies are you most excited about their future prospects?

Whiteman: Lockheed Martin can't help but impress. Lockheed Martin, for years, was tied to the F-35. The F-35 is an amazing program. It's going to be a trillion-dollar program for Lockheed and its subcontractors over the life of the program. What Lockheed has done very well, especially in the last few years, is there's a lot more than just the F-35 to get excited about. We talked about hypersonics, we talked about their Missile Defense and their missiles. There are a lot of ways for Lockheed to win, even looking at the recent earnings. I just wrote something about this. 2019, we'll see what the budget does. But over time, there are so many ways that Lockheed Martin can win. It's a great company to just hold on to and weather the storm. 

Among the big guys, if there was one that feels like a bargain, but I've been saying this a while and they haven't come through for me yet, General Dynamics has been in the penalty box almost since the Great Recession because of its Gulf Stream arm. The business jet industry just has not come back from the recession. I believe Gulf Stream is coming back. I believe as it does, General Dynamics will leave the penalty box, and its multiple relative to its peers will improve. It should outperform its peers. I said that six months ago. We're still waiting. I still believe it. I still like General Dynamics. But I'm losing confidence that this is even a 2019 story, so I would understand investors not jumping in right now.

Sciple: All right, listeners that's two for your watch list in the defense space. Thanks for coming on, Lou, and thanks for talking to us about everything that's going on in this really fascinating industry! I'm happy to have you on soon to follow up!

Whiteman: Sure! 

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass! For Lou Whiteman, I'm Nick Sciple. Thanks for listening and Fool on!

[ending theme]

Sciple: OK, Lou, with Super Bowl Sunday coming up, I'd really be remiss if we didn't talk a little bit about what's going on this weekend. You're in Atlanta. The Super Bowl between the Patriots and the Rams is taking place there this week. What have you seen around town with the prep for the big game upcoming?

Whiteman: It's been fun. There's a lot going on, the Super Bowl Fan Fest experience. I haven't personally gone, but a lot of my friends, a lot of my daughter's friends, have been down there. They put on a good show. There's a lot of concerts this weekend. I'm looking forward to the Foo Fighters Saturday night. We may park outside and watch that. I think there's a football game at some point, but the football game is very much a tiny part of this weekend, which is fun to see. [laughs] 

Sciple: As we talk about the game, do you have anybody you're rooting for on Sunday? Do you have a pick for us? What are you thinking?

Whiteman: For full disclosure, I'm a Saints fan, so I'm probably a little bitter. I refuse to believe a coach 10 years younger than Tom Brady is going to be able to do what nobody else seemingly can do. So, reluctantly -- I know this is not a popular pick -- I just can't pick against the Patriots. 

Sciple: Let's let Austin Morgan in on this talk, go around the horn. What are you thinking for the game on Sunday, Austin?

Austin Morgan: I think if the Rams play a clean game, they might be able to take down the Goliath.

Sciple: I tell you, for me, my heart wants the Rams. I want the young coach, the upstarts, in a new town, a really fun offense, fun team to watch, to come away with it. But my head really says the Patriots. Our listeners who have been listening for a while know I'm an Alabama football fan, so I'll give you a stat. Going back to 2014, every year that New England has won the Super Bowl, Alabama has lost the National Championship. And every year that Alabama has won the National Championship, the Patriots have not won the Super Bowl. And this year, the Alabama Crimson Tide lost to Clemson in the National Championship game.

Whiteman: It's very brave of you to admit that, Nick! [laughs] 

Sciple: Hey, I'm there. And this year, even though my heart doesn't want to say it, I think the Patriots are going to come away with it in Atlanta, just like the Tide did last year at the National Championship game. I don't know how you beat Belichick and Brady. I'm going to be looking forward to watching. Hoping with my hope that the Rams can somehow pull it out. 

Whiteman: Can I end this on a bitter note and say the one thing I'm absolutely sure of is that if Tom Brady needs a touchdown late in the game, that pass interference call will be called if it's the Patriots, not the Saints, that are going up against the Rams' defense.

Sciple: Put your tinfoil hats on, listeners! [laughs] 

Morgan: Maybe they'll give him a little pat on the shoulder, and they'll throw a flag for roughing the passer. 

Whiteman: [laughs] Exactly!

Sciple: All right, folks! We'll all be looking forward to it! We'll come back next week, maybe follow up on what happened in the big game. 

Thanks for coming on, Lou! Let's do it again sometime!