By Dan Froomkin
Stock prices for Lockheed Martin,
General Dynamics, Raytheon and Northrop Grumman set all-time record
highs last week as it became increasingly clear that President Obama was
committed to a massive, sustained air war in Iraq and Syria.
It’s nothing short of a windfall for these and other huge defense contractors, who’ve been getting
itchy about federal budget pressures that threatened to slow the rate of increase in military spending.
Now, with U.S. forces literally
blowing through tens of millions of dollars of munitions a day, the
industry is not just counting on vast spending to replenish inventory,
but hoping for a new era of reliance on supremely expensive military
hardware.
“To the extent we can shift away from relying on troops and rely more
heavily on equipment — that could present an opportunity,” Jack Ablin,
chief investment officer at BMO Private Bank, whose $66 billion
portfolio includes Northrop Grumman Corp. and Boeing Co. shares, told
Bloomberg.
Defense contractor stocks have far exceeded the performance of the
broader market. A Bloomberg index of four of the largest Pentagon
contractors rose 19 percent this year, compared to 2.2 percent for the
S&P 500.
It’s the munition makers who “stand to reap the biggest windfall, especially in the short term,” says
Fortune magazine,
citing Raytheon’s long-range Tomahawk missiles, and Lockheed Martin’s
Hellfires, among others. “Small diameter bombs could be a huge winner,
since aircraft can carry more of them in a single sortie,” one analyst
tells the magazine.
U.S. forces used 47 Tomahawk missiles on Monday alone, at
$1.5 million apiece.
Smart “small-diameter bombs” cost
about $250,000 each.
Richard Clough
writes for Bloomberg:
For defense companies, the offensive against Islamic
State and al-Qaeda extremists is more than a showcase for big-ticket
weapons such as Lockheed’s F-22 Raptor fighter, the stealth jet that
debuted in combat this week.
In its first night of airstrikes into Syria, the U.S. dropped about
200 munitions and launched 47 Raytheon-made Tomahawk cruise missiles,
according to U.S. Central Command. The military also deployed Boeing’s
GBU-32 Joint Direct Attack Munitions and Hellfire missiles from
Bethesda, Maryland-based Lockheed, creating an opening for restocking
U.S. arsenals.
Tory Newmyer’s article in
Fortune does a great job of depicting
the new giddiness in the defense industry:
New fights mean new
stuff, after all. And following the U.S. withdrawal from Iraq and
Afghanistan—and the belt-tightening at the Pentagon imposed by steep
budget cuts—military suppliers are lining up to meet a suddenly restored
need for their wares….
[D]efense analysts are pointing to a pair of sure-bet paydays from
the new campaign: for those making and maintaining the aircraft, manned
and unmanned, that will swarm the skies over the region, and for those
producing the missiles and munitions that will arm them.
“The drone builders are going to have a field day,” says Dov Zakheim,
who served as Pentagon Comptroller during the George W. Bush
administration….
Indeed, the widening conflict could even reverse the trend of
tapering investments in the technology, says Mark Gunzinger, a retired
Air Force colonel and former deputy assistant secretary of defense now
at the Center for Strategic and Budgetary Assessments. “One of the
things that can help a new capability break through is an operational
stressor, like a major air campaign,” he says….
In the longer run, one defense appropriations lobbyist predicts—a
hopeful note in his voice: “we’re going to have to bust through the
budget caps” imposed on the military by the sequester cuts. “We can’t
fight this on the cheap,” he says.
Zacks Investment Research urges investors to buy Lockheed Martin, General Dynamics and Northrop Grumman:
It is likely that the conflict with ISIS will continue
for a while. Such a campaign is likely to provide impetus for defense
stocks in the days and weeks ahead. These stocks would make excellent
additions to your portfolio.
The Pentagon recently estimated that military operations in Iraq were costing an average of
$7.5 million a day between June and last week — an annual rate of about $2.7 billion. But even if costs ballooned to, say,
$15 billion a year, the figure would still be dwarfed by the approximately $1.3 billion a week we’re still spending in Afghanistan.
And for now, there’s no cash flow problem: Obama can just dip into
the “Overseas Contingency Operations” budget, the $85 billion ”
all-purpose war funding credit card” Congress just gave him – $26 billion more than he had even asked for.