Though prime contractor stocks received a boost Wednesday following the election of Donald Trump as the next United States president, one analyst believes more fixed price contracts could be looming on the horizon.
Byron Callan of Capital Alpha Partners said in an interview Wednesday that with Trump running as a populist candidate and Senate Armed Services Committee (SASC) Chairman John McCain (R-Ariz.) likely retaining his gavel due to GOP control of the Senate, defense primes could be put in a position where they’re going to have to execute. Callan, in a note to clients Wednesday morning, said a populist president may be less tolerant of cost overruns on major weapons systems and that greater use of fixed-price contracts may entail more risk for the defense sector. Congress might also push for more acquisition reform, though Callan said in his investor note that it remains to be seen how outreach to Silicon Valley fares in a Trump administration. 
McCain already loaded his fiscal year 2017 defense authorization bill with strong acquisition reform initiatives, and now that Republicans control both the House and Senate and the White House, McCain may see little reason to back off in conference of his acquisition reforms, of which were increased use of fixed price contracts.
“Things like (more fixed price contracts) could maybe offset some of the glee that seems to be expressed today about where defense spending is going,” Callan said.
Callan predicted that a combination of events could drive international fallout from the F-35 program. He said if the dollar further strengthens, it could raise affordability issues to international customers while also potentially making European alternatives more affordable. There are fighter jet competitions developing in Finland and Belgium. In addition, Callan said if a Trump administration tells international F-35 partners like South Korea, Turkey and Japan to spend more of their own money on defense, they could turn to domestic aircraft programs that compete with F-35.
In his note to clients, Callan said the Pentagon budget could grow at a roughly five percent or more compound annual growth rate (CAGR) between fiscal years 2018-2021 off a higher base level in FY ’17 . He said though the FY ’17 budget may not be passed until March or April by a new session of Congress, a GOP majority in both houses should entail that it is at least $18 billion more for FY ’17 than the Obama Administration’s request, with $10 billion of that going to investment.
Callan also expects the Budget Control Act (BCA) to be reversed, allowing additional spending to be included in the base budget and not wartime spending, also known as Overseas Contingency Operations (OCO) spending. Callan also said full details of a Trump defense plan might not be unveiled until the spring, which he called normal given a transition between administrations of one party to another.
Callan in his investor note said Navy shipbuilding and affiliated contractors like BWX Technologies [BWXT], General Dynamics [GD] and Huntington Ingalls Industries [HII] could be key beneficiaries of a Trump administration. He also said missile defense programs could benefit.
Though Trump’s election stole the show Tuesday, there were few surprises or upsets among Capitol Hill elections. The tightest contest was between SASC member and A-10 backer Kelly Ayotte (R-N.H.) and New Hampshire Gov. Maggie Hassan (D). As of press time Wednesday, Hassan lead by 516 votes with all 300 precincts reporting.
Turnover in key Capitol Hill defense positions was largely limited to those who gave up seats to pursue other positions, like House Armed Services Committee (HASC) tactical air and land forces subcommittee Ranking Member Loretta Sanchez (D-Calif.), who gave up her seat to run for a U.S. Senate seat. Sanchez lost to fellow Democrat Kamala Harris. HASC seapower and projection forces subcommittee Chairman Randy Forbes (R-Va.) lost his primary. Callan, in his investor note, said SASC strategic forces subcommittee Chairman Jeff Sessions (R-Ala.) may emerge as a leading candidate for defense secretary in a Trump administration. HASC member Tammy Duckworth (D-Ill.) won her competition against Sen. Mark Kirk (R-Ill.).