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Defense stocks are firing on all cylinders as geopolitical risks rise


RTX Technology
RTX Technology

Defense contractors have done well in the past few years as geopolitical risks have risen globally. Data shows that all 37 publicly traded contractors have accumulated over $1.05 trillion market cap.


RTX, the biggest defense contractor, has risen by 50% this year, bringing its valuation to over $165 billion. Lockheed Martin soared by 36%, while Honeywell, General Dynamics, Northrop Grumman, and L3Harris have all jumped by more than 30% this year. 


Most defense stocks are soaring
Defense stocks are soaring

Rising geopolitical risks

The world has become a more dangerous place, with wars going on in most continents. Russia is still battling Ukraine over two years after launching its special operation. 


Israel is battling Hamas, Hezbollah, and Iran in a crisis that could continue for a long time. This week, Iran fired hundreds of missiles toward Israel, which had also vowed to retaliate. 


Meanwhile, China is planning to eventually invade Taiwan, an action that will lead to more escalation with Western countries. 


Kim Jong Un, the North Korean leader, has continued to build his nuclear weapons, and tensions in the peninsula could continue. China and the Philippines are also having issues, and a crisis could escalate in the coming years.


Therefore, governments have been boosting their defense spending in the past few years. In the US, spending on defence has soared to over $930 billion, and analysts expect that it will get to over $1 trillion if Donald Trump comes to power.


Many NATO members have also boosted their spending in the past few years as risks from China rose.


All this has benefited many defense contractors who manufacture bombs, planes, ships, tanks, and other items. 


Defense contractors are doing well


Companies like Raytheon, Lockheed Martin, and General Dynamics do well when defense spending is rising.


RTX’s revenue has grown from $45 billion in 2019 to over $72 billion in the trailing twelve months (TTM). RTX is the parent company of Raytheon, Collins Aerospace, and Pratt & Whitney.


Lockheed Martin’s revenue has soared from over $59 billion to $71 billion, while General Dynamics numbers have jumped from $39 billion to $42 billion. Other companies like L3 Harris and Northrop Grumman have also increased revenues.


Most importantly, these companies have seen record backlogs. RTX has a backlog of over $200 billion, while Lockheed Martin has $158 billion. Northrop Grumman has $82.5 billion, while General Dynamics has $93.7 billion. These backlog figures will likely continue rising as geopolitical risks jump. 


At the same time, the companies are benefiting from improving supply chain dynamics, which will help them grow their margins. 


Most of these firms have grown their margins. General Dynamics had a net income margin of 7.90%, while Northrop Grumman, Lockheed Martin, and RTX have a margin of over 5%. These figures will continue growing over time.


Additionally, they are rewarding their shareholders with substantial dividends. GD and RTX are dividend aristocrats that have boosted dividends for over 29 years while NOC, LMT, and NOC will become aristocrats in the next few years.

Expensive for a reason


The only risk for investing in companies in the military-industrial complex is that they have become relatively overvalued. Most have a price-to-earnings ratio of over 21, slightly higher than the S&P 500 index average. 


This overvaluation view is because of the expected growth as companies boost their defense spending. These firms have also become so big through organic growth and acquisitions. They have turned into oligopolies with large barriers to entry.


Therefore, there is a likelihood that companies in the military-industrial complex will continue doing well as global risks rise. In addition to the large-well-known firms, other stocks to consider are Huntington Ingalls, AeroVironment, Kratos Defense & Security, and VSE Corporation.


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