Defense contractors

[toughcall]

A peace settlement in Ukraine could initially impact defense stock prices. However, assuming Europe's rearmament plans proceed, with potential defense spending reaching 5% of GDP, which company offers the best long-term investment potential over the next ten years, given Europe's defense requirements and the competitive environment?

 

Focusing solely on exposure, not current/future valuation.

Edited Thursday at 09:15 AM by toughcall

[Xerxes]

Easy answer:  Rhienemetall, SAAB, and Thales etc

 

US defense contractors are primarily long-cycle defense business. Driven by long term security needs. And not directly influenced by ebbs and flow of War in Ukraine. 
 

If anything the war Ukraine has shown the reliability of Western product portfolio and offering in a real setting. Just as 1991 Gulf War demonstrated Western weaponry in a real setting and opened up the market for Gulf nations to place POs for Abrams, Hummers, Patriots etc. even though Saddam was defanged. 

[Spekulatius]

9 hours ago, toughcall said:

A peace settlement in Ukraine could initially impact defense stock prices. However, assuming Europe's rearmament plans proceed, with potential defense spending reaching 5% of GDP, which company offers the best long-term investment potential over the next ten years, given Europe's defense requirements and the competitive environment?

 

Focusing solely on exposure, not current/future valuation.

Try European defense cos.

[Hektor]

On 2/7/2025 at 6:20 PM, Spekulatius said:

On 2/7/2025 at 4:57 PM, rogermunibond said:

 

Hypersonic missile make short work of surface vessels.

Not necessarily. I think a carrier group has the means to defend itself against hypersonic missiles but it does become a number game.

 

https://nypost.com/2025/02/13/world-news/uss-harry-s-truman-aircraft-carrier-involved-in-collision-near-middle-east-port/

 

USS Harry S. Truman aircraft carrier crashes into merchant ship near Middle East port

[Saluki]

I think smaller companies still trade at decent valuations if you look around, but they are suppliers of parts to larger contractors. Taylor Devices makes the landing gear for predator and reaper drones and Optex makes optical devices for Bradley vehicles and howitzers. One is 12x trailing earnings and the other is 10x. Virtra had a small part of a defense contract issued to MSFT, but I don't know if that has been cancelled.

[Spekulatius]

CACI looks really attractive due to headline risk from DOGE. I added today. this might go to $300 if I had to guess based on charts.

[[email protected]]

On 2/8/2025 at 12:13 AM, Dinar said:

So, the 10-K gives two interesting points: a) defense is roughly 33% of their revenues; b) no single customer accounts for more than 10% of revenues.  So unless they are saying that if a part is ordered by LMT for a US gov't defense order counts as a LMT and not US Gov't, then it seems that US government cannot be more than 10% of revenues.  

In addition, one would logically expect that commercial business will grow much faster than the defense business (forecasts call for civilian passenger growth of 4% per annum globally for several decades.)

Also you can't really do anything when its a propriety part . End of the day who else are you going to buy from lol

[toughcall]

On 2/13/2025 at 3:12 PM, Xerxes said:

Easy answer:  Rhienemetall, SAAB, and Thales etc

 

US defense contractors are primarily long-cycle defense business. Driven by long term security needs. And not directly influenced by ebbs and flow of War in Ukraine. 
 

If anything the war Ukraine has shown the reliability of Western product portfolio and offering in a real setting. Just as 1991 Gulf War demonstrated Western weaponry in a real setting and opened up the market for Gulf nations to place POs for Abrams, Hummers, Patriots etc. even though Saddam was defanged. 

 

Thank you. In my opinion, European defense companies excel at product development and will undoubtedly generate sales. However, they are often bloated and/or lack focus on cash flow and returns. I would like to be enthusiastic about both Thales and Saab, but their operational inefficiency makes them unattractive investments. Thales struggles with inflation, a lack of real pricing power (perhaps?), and an enormous headcount.  Despite a significant tailwind, returns are currently poor and will likely remain so.

[dealraker]

A few years ago my niece went to work for Booz (BAH) and it was when the stock had fallen some, I think to a PE of 15 or so but the price was $27-$28.  I gave her 100 shares of stock, I have no children and I have regularly throughout my life given to my younger family members (all but one are extremely responsible).  Angela and I both bought $10k of BAH at that time, Angela's in her retirement account mine in the taxable one.

 

But anyway the valuation of BAH and CACI (CACI which I had bought a bit of recently and quickly sold) escalated immensely with grand performance as it should have.  But these businesses are so dependent on government credit card spending that I think it is absolutely rational to step back and observe.  Basically every business in the US benefits by the guv credit card but for many it is their direct dominant customer.

 

I personally do not think the current administration will lower the deficit but I do sense some abrupt changes and most will be in my view to benefit some chosen individual or group linked to the decision makers.  And to me defense is just the ideal place for all this to happen.  I sense we will have some relative extreme winners and losers and I'm just not able to decide which is what.

 

I do have all the major defense stocks in my taxable account, years-years-years of gains and of course I'm not selling these.

Edited Saturday at 12:12 PM by dealraker

[sleepydragon]

I bought LMT— thought this has to be the safest defense stock. Geez, down 20% as soon as i bought it

[sleepydragon]

This is too funny not to share:

 

[Xerxes]

4 hours ago, toughcall said:

 

Thank you. In my opinion, European defense companies excel at product development and will undoubtedly generate sales. However, they are often bloated and/or lack focus on cash flow and returns. I would like to be enthusiastic about both Thales and Saab, but their operational inefficiency makes them unattractive investments. Thales struggles with inflation, a lack of real pricing power (perhaps?), and an enormous headcount.  Despite a significant tailwind, returns are currently poor and will likely remain so.

 

There is also BAE that straddles both sides of Atlantic. I agree w/ you that the return from the European names will be poor. Referring strictly to their willingness to return cash in a politically charged defense environement.

 

If you are looking for additional material, I think good source of material for A&D is the Aviation Week; i have been getting a print copy for almost +10 years now. A good weekly podast is the following:

 

Defense & Aerospace Report Podcast [Feb 09, ’25 Business Report] - Defense & Aerospace Report

Comes out every weekend and is the first thing I listen to Monday morning.

 

More : (these are all recurring weekly podcasts)

DEFAERO Strategy Series [Feb 11, 25] Bendett & Eugene Rumer on Russia, Ukraine On-going Conflict - Defense & Aerospace Report

DEFAERO Daily Pod [Feb 10, 25] Trump Week Three & Byron Callan’s Week Ahead - Defense & Aerospace Report

 

 

[Spekulatius]

I think European defense is going through a supercycle and they will make a lot of money. They used to lack scale because spending was low but that’s now changing. I think Saab is interesting, based on in their product offerings (excelent submarines, low maintenance Gripen etc)

 

I also think world wide many nations will seek alternatives to Russian and US arms for different

reasons.

 

Just look at the stock performance since 2022 and compare European defense to US defense stocks. Most European defense stocks are already multibaggers. Us defense stocks not so much.

Edited Saturday at 05:40 PM by Spekulatius

[dealraker]

1 hour ago, Spekulatius said:

I think European defense is going through a supercycle and they will make a lot of money. They used to lack scale because spending was low but that’s now changing. I think Saab is interesting, based on in their product offerings (excelent submarines, low maintenance Gripen etc)

 

I also think world wide many nations will seek alternatives to Russian and US arms for different

reasons.

 

Just look at the stock performance since 2022 and compare European defense to US defense stocks. Most European defense stocks are already multibaggers. Us defense stocks not so much.

Great eye opening post Ralf.   

[Spekulatius]

Soon will be updated, I think:

https://armscontrolcenter.org/wp-content/uploads/2020/03/France.pdf

https://armscontrolcenter.org/wp-content/uploads/2020/04/UK-Factsheet_updated.pdf

 

 

[Spekulatius]

On 2/13/2025 at 9:12 AM, Xerxes said:

Easy answer:  Rhienemetall, SAAB, and Thales etc

 

US defense contractors are primarily long-cycle defense business. Driven by long term security needs. And not directly influenced by ebbs and flow of War in Ukraine. 
 

If anything the war Ukraine has shown the reliability of Western product portfolio and offering in a real setting. Just as 1991 Gulf War demonstrated Western weaponry in a real setting and opened up the market for Gulf nations to place POs for Abrams, Hummers, Patriots etc. even though Saddam was defanged. 

I actually bought Rheinmetal during COVID-29 for less than 50 Euro. Sold my shares at 180 Euro and they are now at 800 Euros.

 

They were given away because half their business was auto related and temporarily shut down. If you are around long enough, you see everything.

 

I think Germany may be uniquely positioned to become a large arms producer in quantities due to their deep supply chains. Japan and Korea can also do it.

The US currently not so much. With tariffs to Canada and a Mexico even less so.

Edited Saturday at 11:14 PM by Spekulatius

[Xerxes]

On 2/8/2025 at 12:13 AM, Dinar said:

So, the 10-K gives two interesting points: a) defense is roughly 33% of their revenues; b) no single customer accounts for more than 10% of revenues.  So unless they are saying that if a part is ordered by LMT for a US gov't defense order counts as a LMT and not US Gov't, then it seems that US government cannot be more than 10% of revenues.  

In addition, one would logically expect that commercial business will grow much faster than the defense business (forecasts call for civilian passenger growth of 4% per annum globally for several decades.)

 

for what is worth from the conference call:

 

Gautam Khanna

Great. And then my last one, just on the new administration and how is TransDigm kind of working constructively with them and your thoughts on DOGE, and I'll just leave it open ended, but...

Kevin Stein

That's a great question. I anticipated this earlier, I think, in the Q&A. DOGE is -- it's a great opportunity for the U.S. to improve and streamline what they're doing, specifically with government DoD, DLA procurement. We think this is a really good thing. We've been engaging with the DoD over the past several years and have suggested a number of improved forecasting, inventory management and improved buying practices that would save the government money and save us time and energy in production. So we invite all inquiry and assistance. I've met with some of the DOGE folks in D.C. It's important to remember that TransDigm is a very small supplier. I think we're 0.3% of the DLA budgets and this amounts to less than 1% or somewhere around 1% of our revenue, are these types of products that would fall under a concern of DOGE. We see this only as an opportunity for TransDigm, the government, the DoD to improve what we're doing together.

 

So we warrant any and all inquiries and work together to come up with a stronger solution in the future. So that's really where we're at. It's a small part of our business is supplying spare parts to the government. The bulk of what we do is either falls under TINA today, which is fully cost disclosed? Or is commercial of the type or competitive that's the bulk of our business falls under those 3 categories. So we invite the work that we need to do together to improve how we work together with the government. So that's, I guess, our answer.

 

[[email protected]]

On 2/15/2025 at 9:23 AM, Xerxes said:

 

There is also BAE that straddles both sides of Atlantic. I agree w/ you that the return from the European names will be poor. Referring strictly to their willingness to return cash in a politically charged defense environement.

 

If you are looking for additional material, I think good source of material for A&D is the Aviation Week; i have been getting a print copy for almost +10 years now. A good weekly podast is the following:

 

Defense & Aerospace Report Podcast [Feb 09, ’25 Business Report] - Defense & Aerospace Report

Comes out every weekend and is the first thing I listen to Monday morning.

 

More : (these are all recurring weekly podcasts)

DEFAERO Strategy Series [Feb 11, 25] Bendett & Eugene Rumer on Russia, Ukraine On-going Conflict - Defense & Aerospace Report

DEFAERO Daily Pod [Feb 10, 25] Trump Week Three & Byron Callan’s Week Ahead - Defense & Aerospace Report

 

 

I really enjoy listening to the defense & aero report as well, and try to listen to the roundtable and reports every week as well!

[Xerxes]

4 hours ago, [email protected] said:

I really enjoy listening to the defense & aero report as well, and try to listen to the roundtable and reports every week as well!

cheers. 

[Xerxes]

On 2/15/2025 at 9:23 AM, Xerxes said:

 

agree w/ you that the return from the European names will be poor. Referring strictly to their willingness to return cash in a politically charged defense environement.

 

so that there is no confusion, comment was about capital return (dividend + buyback), and not valuation gain as a result of more volume of business and margins