Citi Analyst Jason Gursky on the Bull Case for the Defense Sector

Defense Sector Outlook

• 🚀 The defense sector is showing strong secular growth, driven by rising global spending, with both the US and Europe increasing their defense budgets.
• 💡 Citi's Jason Gursky is most constructive on defense names heading into earnings, citing budget visibility and potential for margin expansion.
• 🎯 Key companies favored include Huntington Ingalls, Northrop Grumman, RTX, LHX, and General Dynamics.

US Defense Priorities and Beneficiaries

• 🎯 The 2025 budget and upcoming legislative markups highlight priorities such as air missile defense and shipbuilding capacity.
• 🚀 Companies like RTX and Northrop are poised to benefit from air missile defense investments.
• 🚢 Huntington Ingalls and General Dynamics are expected to gain from increased investment in shipbuilding capacity to address the gap with China.

International Sales and European Defense Spending

• 📈 European defense spending is projected to increase significantly, moving from 2-2.5% of GDP to 3-3.5% (or 5% including infrastructure).
• 🤝 European nations are expected to purchase more US-made defense systems, particularly in air missile defense and fifth-generation fighters like the F-35, due to their current lack of advanced technology and capacity.

Defense Tech and M&A Trends

• 💡 Lessons from Ukraine emphasize the need for unmanned, autonomous, and attritable mass in defense.
• 💰 While M&A is active, particularly with private defense tech companies bolstering portfolios, large-cap companies need strong conviction in current valuations for acquisitions.
• 🧩 Private companies like Anduril are actively acquiring to expand their software platforms onto various defense systems.