Al Root

Elon Musk wants to cut trillions of dollars from the Federal budget. That makes some defense stock investors nervous.

"Government services names will continue to be pressured by DOGE headline risk, and potential government spending cuts that may follow," wrote Baird analyst Peter Arment in a Tuesday report.

DOGE, of course, is the newly created Department of Government Efficiency that will be co-run by Musk and Vivek Ramaswamy.

Coming into Tuesday's trading, shares of Booz Allen, V2X, Amentum, Leidos, Science Applications International, and CACI were off about 25% on average since the Nov. 12 announcement of DOGE.

The V2X "selloff is excessive given limited Civil budget exposure," added Arment. And "presents an attractive buying opportunity." He rates V2X stock at Buy and has a $75 price target. Shares closed Monday at $47.55.

Arment also rates CACI and Leidos stock at Buy. He doesn't cover Booz Allen, Science Applications, or Amentum.

However, he cut his price target for CACI and Leidos. His CACI price target went to $540 from $640. CACI stock ended Monday at $446.06. His Leidos price target went to $190 from $218, and shares ended Monday at $152.64.

Arment also cut his Lockheed Martin price target to $540 from $626. He rates shares Hold. Lockheed stock closed Monday at $483.16. "The DOGE headline risk will likely continue to impact [Lockheed] stock, with about 35% revenue mix to the F-35 alone, which is likely to be scrutinized given significant cost overruns and the desire by DOGE leadership to accelerate [the] adoption of [unmanned aircraft over crewed aircraft."

Musk made waves late in 2024 when he criticized the F-35 program -- the world's largest defense program. In a recent report, Melius Research analyst Robert Spingarn wrote that total life-cycle costs -- including procurement, operations, and maintenance -- will run north of $2 trillion.

The U.S. will buy about 2,500 F-35s, and other countries, another 1,000. About 1,500 are operating already.

"It is highly unlikely that the F-35 program will be cut for economic, strategic, and political reasons," added Spingarn. "The F-35 accounts for more than 25% of Lockheed's sales, but it's also a meaningful program for 1,900 suppliers across 48 U.S. states and 10 separate countries."

Aside from size and employment impacts, the plane is still a critical military asset. The Air Force's roughly 2,100 jet fighters average about 27 years of age. "The Air Force's unmanned Collaborative Combat Aircraft $(CCA)$ program is still in its infancy," added Spingarn.

The F-35 is also the most modern jet fighter being built in the West and those jets fill "irreplaceable roles," said AeroDynamic Advisory managing director Richard Aboulafia, adding that drones can't intercept enemy bombers, or launch from thousands of miles away to support naval operations or other strategic objectives.

None of that means criticism of the F-35 is going away. And it can be a headwind for Lockheed stock.

The debate has been positive for unmanned systems maker Kratos Defense & Security Solutions. It's a winner in the DOGE era, wrote Arment, adding it has leading positions in hypersonic and drone technology.

He raised his price target to $40 from $35. Kratos stock closed at $30.89 on Monday.

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

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January 14, 2025 09:10 ET (14:10 GMT)

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