Wednesday, September 26, 2007

Defense Stocks Rise with MRAP News

No surprise here:

Defense stocks on Wednesday hit new highs as Defense Secretary Robert Gates requested an extra $42 billion in funding from Congress to cover military costs in Iraq and Afghanistan in 2008.

The AMEX Defense Index, which tracks 14 major defense company stocks, rose 14.25 to a high of 1,686.72 in afternoon trading. Since last year, the index has risen roughly 47 percent, outperforming the broader S&P 500 index, which has climbed nearly 15 percent over the same period.

Truck is specifically named as one of the beneficiaries of Gates' announcement; and its stock price did indeed see a jump, closing up 1.4% at $57.80 a share.

The midterm outlook for military spending continues to look strong:

Bank of America (NYSE:BAC) analyst Robert Stallard said he expects war-related spending in fiscal 2009 and fiscal 2010 to be $170 billion and $150 billion, respectively. And even after the peak, war spending is still likely to be more than $100 billion annually for the next few years to refurbish and replace war torn equipment used in Iraq.

The size of the supplemental allocation is now raising a lot of eye brows and will likely lead to more people equating DOD's investment in troop safety with investment in an ongoing war:

Spending $23.6 billion on fortified vehicles that will take years to produce is an admission that you [Sen. Biden] are planning a long-term occupation of a hostile population in Iraq, and possibly Iran.

Incidentally, this is the first opinion I have read that sees the push for more MRAPs with a possible invasion of Iran (obviously, since the MRAP can't fly, we're talking about more than just air strikes under these circumstances).

Even though the money being spent on MRAP production is huge, even by defense standards, there are signs of an ancillary effect occurring in other areas of Pentagon spending. Today Lockhead Martin used the MRAP as a reason for further Air Force investment in transport/cargo planes like the C-5 Galaxy:

[LM Aeronautics Business Development Vice President Jim] Grant said modernizing the C-5 fleet remains a fiscally sound solution for meeting the nation's strategic airlift requirements. "The C-5 modernization program capitalizes on the U.S. Air Force's investment in the C-5 and ensures this critical national strategic airlift resource continues serving the warfighter for years to come," said Grant. "Analysis and test data indicates that the C-5M program will meet or exceed all customer requirements, including those necessary to meet wartime objectives to move troops, very large loads and critical outsize cargo, like Mine Resistant Ambush Protected (MRAP) vehicles."

So one could argue that a snowball effect is likely to occur in the future as more and more defense programs begin to see an advantage in demonstrating a support role for the expensive MRAP project. Yet there is a good deal of truth to these sales pitches, one that belies a very real concern that the MRAP will change the way the military functions:

The size of the MRAP may also change the way military units operate. The vehicles are too large to be sling-loaded on a helicopter, meaning they cannot be used in airmobile operations. The behemoth trucks are also too large for some streets. Gen Brogan said he doubted the smaller Humvee would be phased out entirely. "Clearly, these have a different level of protection than an uparmoured Humvee," he said. "There are some villes [towns], though, where roads are narrow, [it's a] constricted area. So I don't think every single Humvee will ever be supplanted. How many are replaced are decisions that will be made by the operations commanders, not by the acquisition community."

Now might be a good time to mention that the estimated cost of $1 million per vehicle is just the base price of an individual MRAP and does not include things like maintenance and fuel.

But the price is not deterring Pentagon procurement officers:

Air Force Gen. Norton A. Schwartz arrived Saturday at the Jacksonville [AR] Museum of Military History with a six-member security detail as a special guest at the 10th anniversary luncheon of the Eaker Chapter of the Distinguished Flying Cross Society.

The four-star general is commander of the Transportation Command at Scott Air Force Base, Ill. The command manages air, land and sea transportation for the Department of Defense...

Besides visiting the museum, Schwartz honored the DFCS members by attending their luncheon...


After the luncheon, Schwartz spoke to the group about the importance of the Air Force transporting MRAP (Mine Resistant Ambush Protected) vehicles to the Middle East. The vehicles have a v-shaped underside to deflect the explosions from mines and improvised explosive devices.

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