President Donald Trump this week proposed a mere 0.3% increase in military spending to $740.5 billion next year.
But inside that budget, there’s a big emphasis once again on high-tech defense capabilities in areas like cyberwarfare, use of the cloud in the battlefield, specialized drones, advanced communications and artificial intelligence.
Here’s some of the military wizardry your tax dollars are paying for, and some of the gear suppliers that will benefit if Congress and Trump see eye to eye on high-tech battlefield gear spending.
Booz Allen Hamilton BAH, +0.56% got its first defense-sector gig in 1940 advising the Navy on how to gear up for World War II. Today it generates 69% of revenue from defense and intelligence customers, and 96% from government agencies overall.
It plays a big role in putting high tech in the hands of soldiers on the battlefield. One example: Booz Allen offers technology that converts giant video files to bandwidth-light metadata that warfighters can more easily download to mobile mapping software.
To protect this intelligence, Booz Allen has a partnership with Dell DELL, +0.63% to supply ultra-secure tablets that can be remotely “bricked” on command if they get in the wrong hands, even when the power is off. It also helps the military with virtual reality software development.
“We have a high degree of confidence in Booz Allen Hamilton, given the company’s strategic role as a bridge between Silicon Valley and the U.S. Department of Defense,” says William Blair analyst Louie DiPalma.
Cubic CUB, -0.12% offers highly sophisticated technology that helps warfighters download real-time satellite imagery practically anywhere. Called phased array technology, this uses collections of antennas to boost signal strength. It offers this technology through its GATR Technologies division. Cubic’s DTECH Labs division helps deploy servers, storage, and networking to battle zones. And its Pixia provides a software platform called HiPER LOOK, a video tool that helps users share and zoom in on images.
When defense agencies want drones, they turn to Kratos Defense & Security Solutions KTOS, -1.40% . Early on, it developed drones that mimic fighter aircraft and missiles for use in training and testing. Kratos likes to keep the technology it develops, so it then leveraged this know-how to develop drones that can be used in warfare. The Air Force has hinted that a recent Kratos drone offering called the Valkyrie will see strong demand because it performs well and is relatively inexpensive, says DiPalma.
Kratos gets 73% of revenue from U.S. government, which is mainly defense and intelligence related. Most of the rest comes from foreign defense agencies.
AeroVironment AVAV, -8.79% offers a kamikaze drone that soldiers can carry in backpacks. Called the Switchblade, this drone can be used for reconnaissance, or to crash into targets with a warhead. The Army may ink a new long-term contract for these soon. AeroVironment offers other drone systems popular with the military, such as the Puma and the Raven.
Iridium Communications IRDM, -1.22% is rolling out transceivers (named 9770) that should generate good revenue growth because of their ability to support beyond line-of-site multimedia feeds from small drone cameras to mobile devices used by soldiers. Called Certus 9770, these should get sales traction soon.
Military personnel have traditionally called in enemy positions on radios. Increasingly, they use data transmissions and mapping software to do the job with better precision. For this, they turn to “Link 16,” a waveform used to communicate location data securely via laptops and tablets. The system then applies artificial intelligence to enhance images. A company called ViaSat VSAT, -2.49% is one of the main providers Link 16 connectivity.
ViaSat is also developing satellites (which it calls the ViaSat-3 constellation) that will give the military high-bandwidth cloud access from remote locations. It sells modems and antennas for satcom equipment. The government accounts for 46% of sales. Otherwise, the company offers rural satellite broadband, in-flight connectivity and satellite services to companies.
Iridium also offers satellite services to defense agencies. Its L-band satellite network routes traffic across its satellite constellation to minimize the need for local ground support. This improves the system’s reach into remote areas that have no phone or broadband service.
Iridium only gets about 20% of its sales from the U.S. government, so it is not a pure play on military spending.
Kratos is also big in satellite control and communications systems.
Parsons PSN, +0.16% has been on an acquisition spree to stay competitive in defense. It recently bought OGSystems and QRC Technologies, among others, to considerably expand its high-tech military gear offerings, says William Blair’s DiPalma.
OGSystems sells sophisticated 3-D image devices and cameras for aerial surveillance. These systems can detect human skin, using sensors that react to hemoglobin. QRC’s technology can sense and map out nearby communications networks and locate the users. One useful application: It can detect if a vehicle is being followed.
Parsons gets a little under half its revenue from U.S. government contracts. Most of the rest comes from the sale of high-tech infrastructure to airports, rail systems and private companies.
Ever since it landed its first Navy contract in 1968, ManTechMANT, -1.39% has been a standing tech arm of U.S. government intelligence and defense agencies. They provide 73% of revenue, and the U.S. government accounts for 98% of sales. That makes this company virtually a pure play on tech-related spending growth in the defense budget.
The company provides software and hardware used in cyberattack defense and offense, electronic warfare, data collection and analytics, and the deployment of computing power in the battlefield.
ManTech is one of the fastest-growing companies in this space, advancing annual revenue to over $2 billion from around $400 million in 2001. This is not a surprise because the company has been founder-run. And in my experience, founder-run companies I’ve suggested in my stock letter have done well. In this case, founder George Pedersen controls 83% of the voting stock. He’s no longer CEO but still plays an active role in the company, so the founder-run halo is still in effect.
Meanwhile, Parson, on its recent acquisition spree, purchased a company called Polaris Alpha. This brought in a software dashboard called C2Core Cyber that provides video feeds and analytics to help manage both cyber and conventional warfare activities.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested KTOS in his stock newsletter “Brush Up on Stocks“.
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