Take, for example, President Obama’s offer to sell South Korea four of Northrop Grumman Corporation (NYSE:NOC)’s highly praised Global Hawks, specifically so South Korea can spy on — er, more closely “monitor” — North Korea’s activity. Also consider that in 2012, the United States’ use of drone strikes rose 72%. The reason is clear: UAVs don’t risk pilot lives, they’re not subject to human fatigue, they cut down on the need for boots on the ground, they allow for precision targeting, and they don’t require the traditional support for combat missions. And besides the Global Hawk — which costs more than Lockheed Martin Corporation (NYSE:LMT)’s F-35 — they’re cheaper overall.
Two more companies that could benefit from this push are Textron Inc. (NYSE:TXT) and AeroVironment, Inc. (NASDAQ:AVAV). Although Textron isn’t exactly a small defense company, it’s nowhere near the size of the giants. Still, with its $8.5 billion market cap, it’s highly unlikely that sequestration can take it down. And with a $2.9 billion backlog in its drone and weapons systems alone, it looks pretty stable.
AeroVironment, on the other hand, is indeed smaller, and budget cuts will have a more pronounced impact on its revenue. Tighter defense spending, coupled with a reported 34% decrease in its drone segment in its latest quarterly report, has already hammered the stock. However, if shares continue to drop, I’d consider adding some to my portfolio. The company has a good product, and it could definitely turn around, but it’s still a little over what I’d like to pay.
Sequester or no, defense spending is tightening. However, there are some elements that the U.S. can’t afford to cut. Missile defense is a prime example, especially with Kim Jong-un doing his little nuclear war dance. The other thing to consider is this: UAVs are the wave of the future, and I can see the U.S. and others relying on them more heavily on them down the road. Consequently, the companies with a strong position in missiles and UAVs are great for long-term investments.
The article What Do Dennis Rodman, North Korean Nukes, and Sequestration Have in Common? originally appeared on Fool.com and is written by Katie Spence.
Fool contributor Katie Spence owns shares of Northrop Grumman. Follow her on Twitter: @TMFKSpence. The Motley Fool recommends AeroVironment and owns shares of AeroVironment, Lockheed Martin, Northrop Grumman, Raytheon, and Textron.
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