Al Root
The defense business is set to change in the second Trump administration. A major industry player has some ideas about what should happen.
L3Harris CEO Christopher Kubasik, on Wednesday, released a letter to the leaders of the Department of Government Efficiency. DOGE, as it is also called, is the newly created quasi-government consultant charged with helping eliminate government waste. President-elect Donald Trump named Musk and Vivek Ramaswamy co-heads of DOGE in mid-November.
With an annual budget in the range of $1 trillion, the Defense Department is likely to end up in DOGE's crosshairs at some point.
Kubasik's company is a leader in defense electronics and hardware generating more than $20 billion a year in revenue. He is looking to get out ahead of the cost debate. "America's current defense acquisition system is slow and bureaucratic and does not provide our warfighters with new capabilities at the speed of relevance to the threats they are facing," wrote the CEO. "It has a structure and a culture that stifles innovation and discourages risk-taking."
Kubasik argues for several things including more software and artificial intelligence-enabled hardware.
He also recommends creating a contracting arm inside the Defense Secretary's office to help speed acquisition and improve program efficiency across all military branches.
Kubasik also wants to reform certified cost and pricing data. Gathering and auditing all the cost data is one reason stories about $600 hammers sold to the military -- costing $12 at Home Depot -- exist. The money for the hammer ends up in the data collection and auditing.
To be sure, Kubasik's stance could benefit L3Harris which has positioned itself as a "trusted disrupter." Still, a letter endorsing a new approach from a major defense contractor signals that reform doesn't have to be bad for existing players -- especially if it means lower development costs and shorter time horizons to deploy new technology.
Investors aren't sure what to make of DOGE and the incoming administration. Tuesday, during his confirmation hearing, Secretary of Defense nominee Pete Hegseth talked about spending at least 3% of U.S. GDP on defense. That essentially implies no large budget cuts and decent growth for the sector. Good news for contractors, but investors seem unsure of how future defense money will be allocated.
Through Wednesday trading, shares of the major defense contractors including L3Harris, Lockheed Martin, Northrop Grumman, Huntington-Ingalls Industries, and General Dynamics were down about 12% on average since Musk and Ramaswamy were named to head DOGE.
The S&P 500 is down less than 1% over the same span. Boeing wasn't included because issues in its commercial airplane business dominate trading in its stock.
Musk, in particular, has been critical of manned jet fighters and appears to prefer unmanned systems. It has helped shares of Kratos Defense & Security Solutions, which makes unmanned and hypersonic weapons technologies. Through Wednesday trading, its shares were up about 25% since mid-November.
The new administration will generate some anxiety for defense investors. They should also take some time to consider the potential benefits of any reform.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 15, 2025 17:51 ET (22:51 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
Comments