Global Conflict Means Billions for U.S. Defense Contractors

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There are Russians running around Crimea. Chinese warships are prowling the Pacific and doing doughnuts around the Indian Ocean. Drug cartels boast military-grade weapons in their arsenals in Mexico. And in Iraq, the war with al-Qaeda is heating up again.

In short, it’s a dangerous world. And while this can’t be called “good” news for anybody, it’s at least not bad news for America’s defense contractors.

Exporting democracy, one bullet at a time
Here in the U.S., tight defense budgets have Congress in a bind, and struggling to balance its checkbook in an attempt to salvage certain weapons programs by “borrowing” money from others. For example, earlier this month, negotiations within the House Armed Services Committee that helped to keep money flowing to Lockheed Martin‘s (NYSE: LMT) trillion-dollar F-35 fighter jet program had the unintended consequence of siphoning money away from other programs.

The Navy’s Littoral Combat Ships program lost $350 million of its funding to committee horse-trading. Another program for decontaminating uranium enrichment facilities used in nuclear-weapon production lost $100 million in funding. A third program, dubbed “Joint IED Defeat” (which funds research into ways to protect soldiers from roadside bombs), got cut by nearly $50 million.

As you can see, there’s a lot of “robbing Peter to pay Paul” going on. However, not every country seems to have our problems.

Weapons for everyone… except U.S.
Even as the House was cutting and shifting funding for some U.S. weapons programs, Congress was presented last week with a series of high-dollar-value weapons programs that are almost certain to receive full funding. But these weapons will be exported to other countries.

From Monday through Friday, Congress received notification after notification from America’s Defense Security Cooperation Agency, advising the legislators of arms deals that have been negotiated and are pending congressional approval. Each and every one of them aims to supply high-tech weaponry from U.S. defense contractors to America’s allies (and sort-of allies) abroad.

Here’s a rundown of DSCA’s foreign arms sales wish list:

Australia
Australia, conscious of Chinese naval movements to its north, seeks permission to purchase close to 500 new AIM-9X-2 Sidewinder Tactical Missiles, special training rounds, and Captive Air Training Missiles, or CATMs, for the Royal Australian Air Force. The missiles will initially be used to arm the RAAF’s fleet of Boeing (NYSE: BA) F/A-18 fighter-bombers. Eventually, the Australians intend to use the missiles on new Lockheed Martin F-35s which they have on order. Raytheon (NYSE: RTN) makes the missiles, and if this deal goes through, the company stands to reap $534 million from the sale.

Belgium
Casting a cautious eye on Russian movements to the east, Belgium is requesting upgrades for its fleet of 49 Lockheed Martin F-15 fighter jets, to include new GPS navigation systems, radio equipment, and identify friend and foe, or IFF, transceivers. Estimated cost: $113 million.

ALSO READ: Countries Spending the Most on the Military

Turkey
The Turkish military shares a sea with the Russians — and Crimea is smack dab in the middle of it. The Turks seek to purchase four dozen MK 48 Mod 6 Advanced Technology All-Up-Round Warshot Torpedoes for installation aboard their fleet of CERBE-class diesel-electric submarines. Including the cost of ancillary equipment and training services, this contract would be worth up to $170 million for principal contractors Lockheed Martin and Raytheon.

Mexico
Mexico has asked permission to buy as many as 3,335 M1152 High Mobility Multi-Purpose Wheeled Vehicles. In its request, Mexico specifically cited the need for these vehicles in its effort to combat organized crime and drug-trafficking organizations within its borders. If approved, the contract will be worth $556 million to privately held defense contractor AM General, which makes the “Humvee.”

Iraq
Mexico is not the only country interested in the Humvee. Iraq’s new democracy is struggling to simultaneously hold its regions together, rebuild its military, and rearm to combat the rising threat of al-Qaeda infiltration from neighboring Syria. To help with this, DSCA last week conveyed to Congress a request by the government of Iraq to buy $101 million worth of Humvees — 200 in all. And while Mexico’s a dangerous place these days, Iraq is even worse. According to the Defense Security Cooperation Agency, the Iraqis have asked that their Humvees come equipped with extra armor plating, and M2 .50-caliber machine gun mounts installed.

The Iraqi military also seeks permission to purchase $90 million worth of “aerostats” — basically, stationary blimps used for surveillance and observation of enemy troop movements — along with attached Rapid Aerostat Initial Deployment tower systems. Seven militarized aerostats and 14 tower systems are sought, with Raytheon serving as principal contractor on the supply project.

Finally, in hands-down the biggest defense contract request of the week, DSCA notified Congress of plans to sell Iraq two dozen of Textron‘s (NYSE: TXT) AT-6C Texan II light attack aircraft. The value of this contract — $790 million — is actually of secondary importance to Textron, though. If approved, it will mark the first significant sale of Textron’s new light attack plane since the company bought Beechcraft last year — and indeed, the first sale of real scale since Beechcraft began marketing the plane years ago.

The upshot
When playing the zero-sum game of U.S. defense spending, every win for one defense contractor’s weapons program is balanced out by a loss as funds are shifted away from other programs. That is not the case with foreign arms sales. Abroad, every contract a U.S. defense contractor wins is money in the bank. And last week, Congress tallied a potential $2.35 billion worth of such foreign contracts.

For the companies that stand to fulfill those contracts, it was a very good week indeed.

 

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