Citi's Jason Gursky talks the bull case for the defense sector

CNBC Television • 4:13 minutes • Published 2025-07-18 • YouTube

🤖 AI-Generated Summary:

Defense Sector Soars: Why 2025 Could Be a Banner Year for Defense Stocks

The defense sector is capturing significant investor attention as we head into a busy earnings week, with major players like RTX, Lockheed Martin, and L3 Harris set to report. According to Citi analyst Jason Gurski, the sector is positioned for substantial growth driven by rising global defense budgets and emerging technological frontiers.

Strong Fundamentals Drive Sector Optimism

The defense sector ETF (ITA) has been performing well, hitting intraday highs earlier this week. This momentum reflects underlying fundamentals that have analysts increasingly bullish on the space.

"It's hard not to like both sides of the ledger," Gurski notes, referring to both defense and aerospace opportunities. "Rising budgets both here in the United States and in Europe provide a lot of visibility for these companies."

Key Catalysts for Growth

Increased Defense Spending: The sector benefits from a global trend of rising defense expenditures, with both U.S. and European allies ramping up their military investments.

Program Transitions: Many defense contractors are moving past poorly performing post-pandemic programs and signing new, more profitable contracts that should drive margin expansion.

Growing Pipeline: Companies are reporting increased bidding activity and improved outlook for future bookings.

Top Investment Picks

Gurski highlights several companies positioned to benefit from current defense priorities:

Missile Defense Leaders

RTX and Northrop Grumman: Well-positioned to capitalize on air and missile defense priorities, including the Iron Dome program

Shipbuilding Powerhouses

Huntington Ingalls and General Dynamics: Set to benefit from increased investment in shipbuilding capacity to address the gap with Chinese naval production capabilities

Additional Favorites

L3 Harris
General Dynamics (also benefits from land systems)

The European Opportunity

One of the most compelling growth drivers is the dramatic shift in European defense spending. European nations are transitioning from approximately 2-2.5% of GDP on defense to a target of 3.5% on pure defense spending, and up to 5% when including supporting infrastructure.

"The United States has been spending 3 to 5% of our GDP on defense for decades," Gurski explains. "The Europeans up until recently were sub-two. They don't have the IP, the capacity, the most capable sets of weapon systems."

This creates a significant opportunity for U.S. defense contractors, particularly in:
- Air and missile defense systems
- Fifth-generation fighters like the F-35
- Advanced weapon systems where European capabilities lag

Emerging Technologies and M&A Activity

The defense landscape is evolving rapidly, with new focus areas gaining prominence:

Defense Tech Revolution

Unmanned and autonomous systems
"Attributable mass" solutions inspired by Ukraine conflict lessons
Integration of AI and advanced software platforms

M&A Landscape

Private companies like Anduril are actively acquiring smaller firms to expand their software platforms across multiple defense systems. However, Gurski notes that large-cap defense companies may be cautious about acquiring defense tech firms at current valuations, requiring "a lot of faith that the revenue is going to pull through."

What to Watch in Earnings

As major defense contractors report next week, investors should listen for:
- Commentary on growing bidding activity
- Outlook for future bookings and contract wins
- Margin expansion guidance as legacy programs conclude
- International sales growth, particularly in Europe
- Investment in new technologies and capabilities

Investment Implications

The defense sector appears well-positioned for sustained growth driven by:
1. Secular trends: Rising global defense spending creates long-term visibility
2. Margin expansion: Transition from legacy programs to new, profitable contracts
3. International growth: European defense spending surge creates new market opportunities
4. Technology evolution: Emerging defense tech creates new revenue streams

For investors considering exposure to the defense sector, the combination of traditional defense contractors benefiting from increased spending and emerging technology companies driving innovation presents multiple avenues for potential returns.

The sector's performance this week and the upcoming earnings reports will provide crucial insights into whether these bullish fundamentals are translating into financial results that justify current valuations and future growth expectations.

📝 Transcript (149 entries):

week for Molina, Centene, Humana and for UnitedHealth. Well switching over to defense. The sector ETF the ITA closing higher this week after hitting an intraday high back on Monday.

Next week we're going to get earnings from defense names like RTX and Lockheed Martin. L3, Harris and others. So what can we expect. And should you be playing any of these names. Well joining us now is Jason Gurski from Citi. And Jason, it's great to have you on. And let's start right there because we do have these secular growth stories.

Whether it's on the defense side, as global spending is on the rise or on the commercial aero side. And now, of course, this whole, I'd say frontier tech new mobility trend seems to be poised for an inflection point as well. So what do you like?

>> Well, it's hard not to like both sides of the ledger that you just mentioned, both defense and aerospace. But going into earnings next week, we're most constructive at this point. On the defense names rising budgets both here in the United States and in Europe, provide a lot of visibility for these companies.

Huntington Ingalls, Northrop Grumman, RTX La Jackson, General Dynamics are a few of our favorites going into the week. Next week, I expect to hear them

talk about, you know, growing bidding activity, the outlook for bookings in the future, and the potential for margin expansion as we get through some of these poorly performing programs that they've had post pandemic, those come to an end.

We're signing on new contracts that are going to be margin accretive for these companies out into the future. >> We just got this 2025 budget.

And now, of course, Congress is marking up both a defense policy bill, the NDAA, and the appropriations bill for fiscal 2026, who stand to be the biggest beneficiaries.

>> Well, look, I think everybody it's going to be a rising tide for sure. But look, as you look at the priorities that the president has laid out, air and missile defense, Golden Dome and those companies that are going to play into that are the missile makers. So RTX and Northrop are two companies that I would point you to.

Shipbuilding, right. He has talked about the gap in capacity between ourselves and the Chinese, with the Chinese having many, many multiples of productive capacity higher than we do here in the United States.

And his desire to invest in the throughput and overall capacity of the shipbuilding industrial base, which is why we're constructive on Huntington Ingalls and General Dynamics.

>> International sales, do those become a growing piece of the overall revenue pie for some of these names? >> Yeah, no doubt about it.

Right. The Europeans are going to go from, you know, roughly two, 2.5% of GDP today to 3.5% on pure defense and 5% if you include some of the infrastructure that they're going to use to support the defense industrial base in Europe. Look, the United States has been spending 3 to 5% of our GDP on defense for decades, and we've been investing in new technologies. The Europeans up until here recently were sub two. They don't have the IP, the capacity, the most capable sets of weapon systems. And so I think we are going to see the Europeans buy more from US companies, particularly when it comes to air missile defense and things like fifth generation fighters like the F-35.

>> Defense tech and commercial space. These are areas where investors are very, very excited, both in public markets and in private markets. Do you think we're going to see whether it's along those lines, or whether it's even along some of the more traditional primes? Do you think we'll see more M&A pick up now?

>> Oh, that's a good question. I mean, look, the certainly the lessons out of Ukraine is that we need a lot of unmanned, autonomous attributable mass.

And that seems to be where a lot of these defense companies are focused today. You've got private companies like Anduril that have been buying companies, right. They they're trying to propagate their lattice software out onto as many platforms as they can. They can get their hands on. So yeah, they're they're certainly engaged in M&A. Look, the value proposition for a large cap company to be buying one of these defense tech companies. You know, they'd have to have a lot of faith at current valuations that the revenue is going to pull through. So but look I think a lot of these these privately funded defense tech companies

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