Al Root

As investors weigh the impact of several dramatic policy changes on the global defense industry, there is another emerging industry trend for them to consider: Deconsolidation.

In the Trump 2.0 era and his peace through strength mantra, it may be advantageous for contractors to be smaller and more focused, rather than seeking the scale benefits and diversification the industry has pursued in the past.

Take L3Harris Technologies. On Tuesday, it announced a blockbuster deal with the Pentagon, which is investing $1 billion into L3Harris' missile business, which will be spun off in an initial public offering later in 2026. The end result is a standalone missile franchise, serving only military customers, focused on growth.

The move by L3Harris "is innovative and shareholder-friendly, while also likely to satisfy the DoD's desire for U.S. defense contractors to make more stuff quicker," wrote Vertical Partners analyst Rob Stallard on Tuesday. "We could see other U.S. defense contractors looking to pursue such an approach."

Jefferies analyst Sheila Kahyaoglu went a bit further. L3Harris "has begun the deconsolidation of the primes," she wrote on Tuesday. "Recent executive orders on strengthening the defense industrial base incentivize speed and investment, which could lead to further de-consolidation in Defense."

Missile businesses trade for an average of 15 to 31 times estimated earnings before interest, taxes, depreciation, and amortization, or Ebitda, she said. Large contractors trade for closer to 13 times. There could be significant value creation in pursuing a smaller, higher growth strategy.

Kahyaoglu has some other ideas, besides the L3Harris deal. Lockheed Martin could spin its missile and fire control business, unlocking 30% upside for Lockheed stock. RTX could consider spinning the defense business, which it combined with United Technologies in 2020. And General Dynamics could separate its Gulf Stream business jet unit.

It's too early to tell how things will develop and it isn't easy to break apart companies. But if L3Harris's missile IPO goes well, investors can be sure that other companies will consider following suit.

Potential deconsolidation adds to the maelstrom that defense policy has been in lately. The Department of Defense, now called the War Department, is investing directly in companies, demanding greater production and new technology. Meanwhile, President Donald Trump plans to dramatically increase defense spending while forbidding share buybacks and dividends for contractors that are late delivering the latest technology.

It's been a lot to digest. At least, investors can be soothed by stock performance. Many of the changes translate into higher growth expectations, which have boosted investor sentiment. Coming into Wednesday, the iShares Aerospace & Defense ETF has risen more than 60% over the past 12 months.

Write to Al Root at allen.root@dowjones.com

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January 14, 2026 06:00 ET (11:00 GMT)

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