Wars raise profit outlook for US defense industry in 2024

US Aerospace

18/12/2023 11:00

By Mike Stone
       WASHINGTON, Dec 18 (Reuters) - When the Pentagon pulled
the world's biggest defense contractors into a meeting to tell
them to ramp up production shortly after Russia invaded Ukraine,
one CEO hesitated, saying they did not want to be stuck with a
warehouse full of rockets when the fighting stopped, according
to three people familiar with the discussion.
    Nearly two years later, big defense firms are singing a
different tune, with several expecting strong demand in 2024 as
the U.S. and its allies load up on expensive weaponry and
munitions with an eye on what they perceive as more aggressive
actions from Russia and China.
        The math is simple. For example, to meet demand for
missile defenses, production of Patriot interceptors for the
U.S. Army - a projectile fired at an incoming missile with the
aim of knocking it down - will rise from 550 to 650 rockets per
year. At around $4 million each, that's a potential $400 million
annual sales boost on one weapons system alone.
    Since increasing production volumes of older systems is
always more profitable than the high investment costs associated
with ramping up production of new systems, stronger demand will
flow quickly to the corporate bottom line.
    Shares of the biggest defense companies, which have handily
beat the benchmark S&P 500 stock index for the last two years,
are expected to keep rising, according to Wall Street estimates.
    Lockheed Martin  LMT.N , General Dynamics  GD.N  and
Northrop Grumman  NOC.N  shares are forecast to rise between 5%
and 7% over the next 12 months, while the S&P is seen making
limited gains.
    US weapons stockpiles were not "full" before Russia invaded
Ukraine, said Eric Fanning, chief executive of the U.S.
Aerospace Industries Association, and "adversaries are seeing
our stockpiles starting thin and being depleted." As a result,
demand is being driven by Chinese aggression, fear about Russian
aggression and to support allies in the Middle East, he said. 
     
        PATRIOTS AND ROCKET MOTORS
    Patriot systems production can be broken down to show how
sales of basic items will impact a range of companies. To start,
RTX  RTX.N  manufactures the radars and ground systems, and
Lockheed Martin manufactures the latest generation interceptor
missiles.
        RTX boosted launcher and control system production to 12
units a year. A launcher and radar together cost around $400
million each.
    Boeing  BA.N  has said over the next few years it will
increase its Huntsville, Alabama, factory production capacity
for sensors that are used to guide Patriot missiles by more than
30%.    
    Another strong demand signal can be seen in the backlog of
solid rocket motors which are used by the vast array of arms in
high demand since Russia's full scale invasion of Ukraine in
February 2022.
    The U.S. has two main rocket motor makers, Northrop Grumman,
and L3Harris Technologies  LHX.N , which both said they have
seen demand increase.
    Northrop said much of the increase is due to demand for its
rocket motors and warheads in the Guided Multiple Launch Rocket
Systems (GMLRS) which are heavily used in Ukraine.
    GMLRS are GPS-guided rockets with 200-pound (90kg) warheads.
Lockheed Martin makes 10,000 of the missiles per year and is
increasing production to 14,000. They have an average cost of
$148,000 each according to Army documents and more than 6,100
have been sent to Ukraine so far, according to a Reuters
analysis. 
    "Each day the munitions are being fired reinforces the need
for substantive stockpiles," Tim Cahill, who runs Lockheed's
Missiles and Fire Control business - a prime contractor for
Patriot interceptors and GMLRS - said in a Reuters interview.
"And I don't see that going down."
    An executive at a rocket motor maker said the administration
of President Joe Biden prioritized munitions in its 2024
Pentagon budget request. 
        He expected a boost to order backlogs once contracts
came through following the passage of the $886 billion defense
policy bill known as the NDAA, or National Defense Authorization
Act. It was approved by Congress last week and Biden is expected
to sign it into law.

 (Reporting by Mike Stone in Washington; editing by Chris
Sanders and Grant McCool)
 ((mike.stone1@thomsonreuters.com; https://twitter.com/MichaelStone;))