This week sees some of the West’s biggest arms companies reporting March quarter earnings and the question for investors is will war again be good for them?
Perhaps not for the March quarter but certainly the June and September quarter will be even better.
Boeing, General Dynamics, Raytheon, Northrop Grumman from the US report, while French giant Dassault also delivers its earnings.
BAE, the UK arms giant has an update on May 5 while Rheinmetall, the German arms major, reports its first quarter figures the day after.
If last week’s quarterly performance revealed by Lockheed Martin is any guide, the March figures from its peers won’t be all that flash – Lockheed saw first quarter 2022 dip to $US15 billion, from $US16.3 billion in the first quarter of 2021. Net earnings in the first quarter totalled $US1.7 billion, down from $US1.8 billion a year earlier.
The surge in the share prices of these giants is all about what is coming from the billions of dollars being spent on new orders and new contracts for Ukraine and replenishing the arsenals of the US, France, Germany, Poland, Sweden, UK, Italy and Spain.
The share prices of some have done very well – others have weakened. Rheinmetal, the German military vehicle, gun and ammunition maker has seen its share price surge by 155% since the start of the year. It makes rapid fire cannon type guns used against aircraft and troops as well as a fleet of armed vehicles (some of which are being built in Australia for the army).
Shares in BAE Systems of the UK are up 34%. Shares in Lockheed Martin have risen 25%, Northrop Grumman, another US giant, by 16%, while General Dynamics, another integrated arms maker has seen a 15% rise in its share price.
Given that Wall Street is off more than 10% (for the S&P 500) and 18% for the Nasdaq, the performance of some of these companies has been spectacular, but the needs of war always smile on these companies, though not as equally as many outsiders might think.
Dassault Systems, the French arms group (especially planes) has seen its share slide 21%, while shares in US ammunition and explosives maker, Olin and Vista have also fallen.
Shares in plane makers Boeing and Airbus are also down by 15% and nearly 10% respectively so far in 2022 – both also make military aircraft such as fighters, helicopters, drones and equipment.
The sector’s outperformance shows up in a MSCI index tracking aerospace and defence shares which the Financial Times points out has beaten a broader gauge of worldwide equities by 17 percentage points in US dollar terms since early January.
Russia’s invasion of Ukraine on February 24 has been the catalyst and the escalating military orders to supply new and re-supply existing arms, ammunition and other equipment (such as drones) has raised investor expectations of higher revenues and stronger profits for companies in the defence sector.
Yet some have warned of premature enthusiasm over defence stocks, arguing that it is still too early to say when the promises of bigger budgets will translate into surging profits.
The US, UK and other allies (such as Sweden, Germany, Spain and Italy) have pledged significant sums in military assistance to Ukraine and sent hundreds of anti-tank missiles, drones, ammunition and other weapons to the country.
The US alone has offered more than $US3 billion, including a new $US1 billion aid package announced on Thursday that will include heavy artillery and tens of thousands of rounds of ammunition.
Analysts though reckon the early surge in some share prices is the market’s usual attempt to price in longer terms benefits now when there is doubt that the scale of benefits is questionable.
“If you put something into the budget this year, a tank or an aircraft or naval vessel, it won’t be delivered until 2023, 24, 26 in some instances. You see the moves in these stocks and in the sentiment but . . . managements are a little reticent to frame what all these mean for their companies,” said Byron Callan of research group Capital Alpha Partners, according to the FT.
But defence has moved back up the list of government priorities in 2022 (helped by China’s aggressive stance in Asia). Germany has announced a historic shift in defence policy and said it would launch a €100 billion fund to modernise its armed forces. That has helped shares in German arms groups, led by Rheinmetall’s price surge.
This week will provide a timely update but most investors long defence stocks will be looking for bigger boosts in three, six and 12 months’ time.
