Space has become contested as the emergence of China and Russia in this domain challenge U.S. dominance. DoD investment is growing dramatically to mitigate the risks posed by adversaries. The U.S. DoD modernization budget more than doubled (to ~$16bn) from 2016 to 2021. Our top stock pick is NOC.

The U.S. became a dominant player in Space during the 1960s and used it as a safe haven to host DoD assets

Beginning in the 1960s, the U.S. leveraged Space primarily for scientific and national pride purposes. Over time, what began with NASA migrated to the U.S. Air Force. Following the Cold War, the U.S. emerged as the lone dominant player in Space and went on to utilize it as a safe haven for many of its critical capabilities.

In 2007 China fired an ASAT and achieved a successful intercept of one of its failing satellites

China ended the perception of Space as a safe haven for the U.S. in 2007 when it tested an anti-satellite (ASAT) missile. The missile struck a failing Chinese weather satellite at an altitude of 537 miles while traveling at 18,000 mph. In addition to China, Russia has made investments in ASAT weapons. Today, adversaries have a wide range of offensive capabilities, including electronic warfare (EW), Cyber, non-kinetic, and on-orbit robotics.

Protecting US capabilities is strategically important as we rely on space for a wide range of capabilities

The U.S. military and intelligence community are highly reliant on Space-based capabilities including communications, navigations, missile warning, and surveillance. Few if any missions are conducted without the aid of satellites. In addition to National Security, commercial space assets are integral to the U.S. economy. A 30-day outage on GPS alone could create a $45bn loss for U.S. companies. Therefore, U.S. ability to protect its interests in Space go beyond national.

Spending went from ~$7bn to ~$16bn over the last 5 years and is expected to continue growing

Space has become a top priority for the DoD given the combination of U.S. reliance and emerging threats. As such, investment accounts have grown at a ~17% CAGR over the last 5 years to ~$16bn in FY21. Over 50% of current investment dollars are directed toward technology development to mitigate those threats. We expect this trend in budget growth and allocation to continue for the foreseeable future.

Beneficiaries of the reprioritization of Space and corresponding spending growth are NOC, LMT, and LHX; top pick NOC

Space is supportive of our investment thesis for NOC, LMT, and LHX. All three companies have over 10% of their revenue exposed to the domain and have been growing. Within this group, we see NOC as best positioned to capitalize on the trend following its acquisition of Orbital ATK, giving the company end-to-end capabilities.