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Earnings season is nearing its end and military-industrial complex players are reporting how they’ve done this year in the midst of a recession and the COVID-19 pandemic.
Good news for U.S. arms companies: war is great business under all conditions, especially with rising U.S.-China tensions.
Lockheed Martin continued to outperform the S&P 500 by 40%. The firm is building F-35 Lightning IIs -- a trillion-dollar, decades-long boondoggle beset by persistent failures -- and credited the fighter jets for 30 percent of its net sales in 2020. The F-35 supports around 200,000 direct and ancillary jobs in 46 states, making the program politically unkillable despite the cost overruns and technical problems.
Another boost for Lockheed Martin: sales of laser-guided weapons for the U.S. military replenishing stockpiles worn down by bombs dropped on people in the Middle East. The company also expects continued growth in hypersonic weapons -- very fast, long-range missiles powered by scramjets, intended for a future war with China.
Northrop Grumman also beat earnings expectations on the back of hopes for war with China: the B-21 Raider -- the Air Force’s new stealth bomber expected to take flight in 2021 -- and high-altitude naval surveillance drones are part of Pentagon planning for that conflict. Northrop is also teamed up with Lockheed as a subcontractor on the F-35.
Military giant Raytheon also smashed earnings expectations thanks to the F-35 program -- they build radar systems and weapons for the jet -- but the stock fell anyway due to exposure to the commercial market. Subsidiaries Collins Aerospace and Pratt & Whitney, which make avionics systems and jet aircraft engines for the civilian market, saw sales fall 36% and 32%, respectively.
This dichotomy between more military-focused players and those with significant consumer exposure is the main dividing line in the military-industrial complex. As demand drops, consumer exposed companies are suffering, while those focused on pure-play warmaking are doing just fine.
Boeing exemplifies the “diversified” arms company taking big hits during COVID. The company’s losses amounted to $2.4 billion in Q2 due to a collapse in demand for commercial airlines. The quarter would have been even worse for Boeing were it not for its military sales such as the KC-46 refueling tanker for the Air Force and a carrier-borne tanker drone, the MQ-25 Stingray -- another intended China killer.
One military-facing firm did suffer a big pandemic loss: $167 million sunk by major shipbuilder Huntington Ingalls Industries. Workers falling ill and requiring quarantine slowed construction of the company’s guided missile submarines, contributing $111 million to the loss.
Despite these wins for weapons makers, their performance has lagged behind FAAMG tech stocks. In fact, defense spending might be reaching a ceiling right now.
Global defense spending reached a 10-year high in 2019 with the United States accounting for $732 billion, or 38 percent of the world total. The global COVID shock is having an effect here as well: South Korea, Thailand and Indonesia -- all three buyers of American gear -- have announced defense cutbacks this year. Other customers for U.S. weapons may not be far behind.
The Pentagon has responded with offers of delayed payments and novel financing mechanisms such allowing overseas buyers to draw on standby letters of credit from foreign banks operating in the United States.
While Congress' stalled COVID relief package is padded with military spending on top of the $705 billion proposed for the 2021 fiscal year -- it’s only an additional $30 billion, with further cuts possible if Democrats retake the White House. Stock values are discounted future cash flows, and investors appear to be hedging their bets.
Even future military cuts, however, are likely to be minimal. Following the 2007-2008 recession, U.S. military spending actually increased, peaking in 2010 before declining to pre-recession spending and leveling off before rising again in recent years.
Over the long term, history shows the military industry always wins.
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Photo: U.K. Ministry of Defense, U.S. Navy