Summary
- Administration is unlikely to approve specific Raytheon sale to Saudi Arabia for precision guided ammunition.
- Raytheon already de-risked this in its Q4 2020 report.
- Obtaining licenses for direct commercial sales for offensive weapon systems might become more difficult.
- Most sales will continue to stand and the current change for the deal aligns weapon sales with the administration’s foreign policy.
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With the transition in the White House there has been the fear that defense budgets would be significantly reduced. In this report, I have a look at where defense is suffering from the change in administration and that suffering does not come so much from a reduced defense budget as I show with an example from Raytheon Technologies (RTX).
Source: UK Defence Journal
Little change in defense budget expected
Beforehand I expected little change in the US defense spending, or said differently, many of the pressures that were playing under the former administration would continue to play a role under President Biden. COVID-19 could be pressuring international defense budgets, but a tough stance on China and China's expanding defense budgets requires continued investments in equipment, and while President Biden will be trying to re-establish strong relations with allies, there will be continued pressure on allies to add to the budgets and while there have been improvements in the Middle East, the situation remains pressured. Based on those various elements I expect that defense companies should continue doing well.
Raytheon reverses order
While I strongly believe that the above does hold, the truth is that some sales will not materialize for now. President Biden has temporarily suspended some direct commercial sales (DCS) to the Kingdom of Saudi Arabia. These sales include a $478 million order for Raytheon Technologies for precision guided bombs, likely the Paveway IV. Previously Raytheon Technologies had assumed that it would be able to continue doing business with the Kingdom of Saudi Arabia, but noted the following in a filing:
