The largest defense companies on the stock market

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The US defense industry consists of a group of companies fighting over contracts with a single customer – the US government – with a seemingly insatiable appetite for its products.

The US government spends over $ 700 billion a year on defense, as well as billions more on intelligence and space. A good chunk of the total goes to soldiers’ salaries and benefits and other purposes unrelated to supply, but the U.S. military also spends a big chunk on tanks, ships, and planes built by the sub. – defense contractors.

Image source: Getty Images.

Why invest in defense stocks?

Large clients rightly attract most of the attention of investors. The so-called bonuses which mostly deal directly with the government instead of serving as subcontractors to other companies have rationalized to become highly skilled specialists competing for the award of multi-billion dollar contracts. Taken into account dividends, five of the six largest defense contractors outperformed the S&P 500 Index over the past 10 years.

CNP Total Return Price Table

Defense takes precedence over 10-year total return over the S&P 500 given by YCharts.

Defense actions tend not to be high profile like technological actions, but they offer predictable and stable returns. They tend to move based on what’s going on in Washington, DC, rather than on the cyclic movement economy.

They can offer a mixture of slow but steady growth and income to a portfolio. Thanks to the extended duration of government contracts, they can provide predictability of revenues in the future.

Defense investment 101

It is important to understand some basics about the defense industry. Generally speaking, any company that derives the bulk of its income from government clients, be it the Pentagon, civilian agencies or intelligence services, is considered a defense subcontractor.

There are a few specialists, but after a period of intense consolidation in the 1990s, most large entrepreneurs have many different businesses. Most have at least two areas of focus, such as warplanes and missiles or ships and tanks, so they don’t depend too much on a single contract. But none are jack-of-all-trades capable of competing for anything the Pentagon desires.

The key to investing in the industry is to choose carefully between subcontractors based on the Pentagon’s areas of interest and the relative valuation gaps between companies that can be explained or are expected to narrow over time.

The biggest defense companies

Here are some of the biggest names in defense:

Defense Company

Market capitalization

Compall The description

Boeing (NYSE: BA)

$ 136.3 billion

Better known as a manufacturer of commercial aircraft, Boeing also has a significant defense business focused on aircraft and drones and one of the leading space franchises.

Raytheon Technologies (NYSE: RTX)

$ 131.5 billion

The result of a 2020 merger between Raytheon and United Technologies, RTX manufactures a number of missile systems and electronic defense systems, in addition to a wide range of commercial aircraft components.

Lockheed Martin (NYSE: LMT)

$ 100.0 billion The world’s largest pure defense contractor, Lockheed Martin specializes in warplanes, helicopters, missiles, electronics and space.

Northrop Grumman (NYSE: NOC)

$ 57.7 billion

Northrop Grumman manufactures most of the US bomber fleet, and it also plays a key role in a number of space programs and manufactures components for warplanes made by others.

General Dynamic (NYSE: GD)

$ 55.1 billion

General Dynamics’ defense focuses on warships, tanks and information technology. It is also the parent company of Gulfstream, one of the world’s largest manufacturers of business aircraft.

Date source: Yahoo! Finance. Data current as of August 9, 2021.

1. Boeing

Boeing is best known for its commercial aircraft empire, and defense accounts for less than a third of total sales. But it is still sufficient to place the company among the largest defense subcontractors.

As you might expect, much of Boeing’s defense portfolio is aviation-based. Boeing has an extensive portfolio of aircraft and helicopters in service, including the F / A-18 Super Hornet, F-15 fighter, Apache helicopter, and a number of surveillance and support aircraft.

Boeing also manufactures several missiles and has significant space activity. In addition, it has established itself as a leader in drones and other autonomous systems.

2. Raytheon Technologies

Raytheon doesn’t have a massive signature program like a bomber or warship, but it does make the high-tech electronics and sensors that go into many of these systems. Its missile systems, including the Patriot defense batteries, are among the best in the world, and it provides sensors and other equipment to the intelligence community.

A Raytheon Patriot missile battery is launched into the desert.

Image source: Raytheon.

Thanks to its merger in 2020 with United Technologies, Raytheon has a broad portfolio of aerospace businesses, including Pratt & Whitney and Collins Aerospace engines. Mix of Defense and Commercial Income Means Raytheon Is Not Overly Dependent on the Pentagon or Commerce Airlines companies, although it also means that when airlines were hampered during the COVID-19 pandemic, Raytheon’s shares fell more than pure defense premiums.

Raytheon also has more international exposure than its peers, thanks to both its business activities and the global appetite for missiles.

3. Lockheed Martin

Lockheed Martin is the largest subcontractor in terms of defense revenue – Boeing and Raytheon both do the majority of sales of non-defense companies – and the major subcontractor for some of the Pentagon’s largest projects . Its flagship program is the F-35 Joint Strike Fighter, which is expected to generate over $ 1,000 billion in lifecycle sales to the United States and its allies.

An F-35 in flight.

Image source: Lockheed Martin.

However, Lockheed Martin is more than just a marvel. It is a major producer of missiles and missile defense systems, and has a dominant helicopter franchise and rapidly growing space business.

Lockheed Martin is the director of the famous Skunk Works research center in California which has produced some of the most iconic military aircraft models. Much of that R&D muscle these days goes hypersonic, meaning that missiles and planes travel at more than five times the speed of sound that the Pentagon considers a priority.

4. Northrop Grumman

Northrop Grumman is an entrepreneur focused on the skies above. The company’s flagship programs are its bombers, including the original stealth bomber and the future B-21. It also manufactures important subsystems for the F-35 and other aircraft.

The B-21 is an $ 80 billion lifespan program, and Northrop Grumman is also the prime contractor for the planned nine-figure overhaul of the country’s aging intercontinental ballistic missile arsenal.

Northrop Grumman was almost sold to Lockheed Martin in the late 1990s, but the deal was ultimately blocked by regulators as anti-competitive. The company seemed adrift for a while after that, unsure of how to navigate on its own. In recent years, however, Northrop Grumman has found a clear mission and is evolving into an air and space defense powerhouse.

5. General dynamics

General Dynamics has an impressive portfolio of defense products. It is the primary supplier of tanks and heavy land vehicles to the US government, and also owns a number of shipyards where nuclear-powered destroyers and submarines are manufactured. But the company has been underperforming in recent years for reasons unrelated to defense.

General Dynamics also owns Gulfstream, one of the world’s largest manufacturers of business aircraft. This part of his activity never recovered from the 2008-2009 recession, undermining results and making General Dynamics underperform its more defense-oriented peers.

Additionally, the company is one of the government’s major IT vendors, operating networks and doing top secret work for the Pentagon, spy agencies, and civilian bureaucracies.

Large defense companies are growing

Bigger doesn’t always mean best, and just buying the biggest names in the defense industry is no way to invest. But in an industry that requires massive specialist manufacturing skills, access to security clearances, and strong relationships with government buyers, size matters.

The world is not getting any safer, and the government’s appetite for the products these companies are selling is not expected to abate anytime soon. The order of rankings can change over time, but there is good reason to expect the current list of top defense companies to look quite similar to that established in a few years.

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