Companies in the military-industrial complex will be in the spotlight this week as geopolitical risks rise and as the US Congress prepares a vote on Biden’s supplemental package for Israel, Taiwan, and Ukraine.
BAE Systems, Lockheed Martin, and RTX stocks are risingIn the UK, BAE Systems (LON: BA) share price has surged and is hovering near its all-time high. It has soared and is up by over 270% from its lowest level in 2020.
Meanwhile, in the US, Lockheed Martin (NYSE: LMT) shares have risen to $450, a few points below the all-time high of $493.98. They are up by almost 90% from the lowest point in 2020.
RTX, formerly known as Raytheon, closed at $100 on Friday as it loiters near the all-time high of $102.32. Other companies in the military-industrial complex like General Dynamics, Northrop Grumman, and Huntington Ingalls Industries have all risen sharply in the past few months.
Raytheon vs Lockheed Martin vs BAE Systems
This increase has coincided with the general bull run of US stocks as the Nasdaq 100 and S&P 500 indices are nearing their all-time highs.
It has also coincided with the ongoing buying of defense stocks by Washington insiders. A recent report by Quiver Quantitative noted that four of the 15 most held companies by US politicians were in the defense industry. They include the likes of Lockheed Martin, Northrop Grumman, Raytheon, and General Dynamics.
I recently created a "DC Insider Score" by combining data on:
– Congressional trading
– Corporate lobbying
– Government contracts
It quantifies how closely companies are tied to the US government.
CURRENT TOP 15:
1. Lockheed Martin
2. Ford
3. Microsoft
4. Northrop Grumman
5.… pic.twitter.com/Vnd0abAHvK
The recent rally in defense stocks could continue this week now that Iran has attacked Israel as a response to Israel’s bombing of its consulate in Syria. It is unclear how Israel and her Western allies will respond.
House to vote on Ukraine and Israel fundingMeanwhile, the House of Representatives is set to vote on a spending package that will have funds for Taiwan, Ukraine, and Israel. While the $90 billion funds are meant for these countries, most of them will go to the so-called Defense Industrial Base.
All these companies have already seen strong inflows of orders in the past few years. Lockheed Martin ended the year with a record backlog of over $160 billion while Raytheon had over $196 billion of backlog. BAE Systems had a backlog of more than £70 billion.
Meanwhile, General Dynamics had a backlog of over $93.6 billion in backlog while Northrop Grumman’s backlog stood at more than $84 billion.
Most of these firms also boosted their shareholder returns. RTX repurchased shares worth over $10.3 billion and paid $3.1 billion in dividends. Lockheed Martin is currently implementing share buybacks worth over $13 billion.
Still, these companies are facing substantial challenges despite the surge in backlogs. Most of them manufacture highly complicated products. As such, ramping up their production will not be easy.
Also, they are battling with rising cost of doing business. As I wrote last week, the price of copper, iron ore, and other industrial metals has jumped sharply in the past few months. This jump could lead to thinner margins in the near term.
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