WASHINGTON — Modest improvements to the defense spending climate, buoyed by strong commercial sales, creates a stable environment in the defense sector, the credit rating agency Moody's said in its monthly outlook for the global aerospace and defense industry published Wednesday.
Continuing demand for commercial aircraft will help offset the pressure of tight Pentagon budgets, allowing overall operating profit growth of between 2 and 4 percent over the next 12 to 18 months, Moody's projected.
"Our more optimistic view of profit growth reflects an improving (albeit still pressured) defense budgetary climate, ongoing cost reduction initiatives and related improvements in operating efficiencies," the outlook states. "The recovering US economy and elevated geopolitical risk appear to be fueling support in Washington for an increase in fiscal 2016 defense spending above sequestration caps."
While there are indications that Congress is willing to fund the Defense Department above the levels set by 2011's Budget Control Act, fiscal hawks will likely limit the DoD's base budget growth to single digits through 2020, according to the outlook.
Byron Callan, managing director of Capital Alpha Partners, also pointed to growing geopolitical instability in his April scorecard for the defense industry.
It is too soon to forecast the effects of the Saudi-led intervention in Yemen, but its success or failure could have implications for the industry, particularly high-end weapon buys, Callan noted. The possibility of a Russian offensive in Ukraine and counter-ISIS activities may also help create a more positive outlook for major contractors.
"US defense investment spending is on the verge of a multi-year upturn," the scorecard states. As the DoD is able to better plan ahead, major weapon modernization programs will see increases.
Callan also projects operating margins to be stable or to increase, depending on the company.