China Is Building Its War Machine: Part 2

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China is confident enough after having worked on one aircraft carrier to signal that it intends to ramp up production with bigger and better versions. That's a concerning sign since tensions with neighbors has been increasing. The U.S. military/Industrial complex could be long-term winners.

Bulking Up

Bloomberg reports that China's defense spending has more than doubled since 2006. A huge increase that shows just how important it is to the country's leaders to be able to better project the nation's power. Indeed, increasing tensions between China and Japan over disputed islands, and squabbles with Vietnam and the Philippines, may make such a show of force desirable.

Unfortunately, Rumi Aoyama, a professor at Waseda University in Tokyo, was quoted by Bloomberg as saying that relations between China and Japan were so bad that “At this point, it’s about maintaining lines of communication to make sure things don’t get worse.” This isn't a good sign for a country that is a key regional ally.

In the end, The United States may be called on to help in some way. A direct military confrontation with China is obviously a last resort. That's particularly true after two long wars and a renewed focus on cutting military spending at home. So, supporting our allies in an arms race could be the most desirable option.

Selling Abroad

The best part for investors is that such a move would likely increase sales in the U.S. military/industrial complex. The recent trip by U.S. Secretary of Defense Chuck Hagel to the Middle East is the perfect example of what could take place in Asia. Basically, he made the trip to sell military gear to Israel, Saudi Arabia, and the United Arab Emirates. One big deal was the first ever export of Bell Helicopter's tilt-rotor V-22 Osprey.

In part one of this two part article, I wrote about Lockheed Martin, Raytheon, and Northrop Grumman, all of which have a heavy focus on military/government sales. Here are a few more names to consider that have more diversified portfolios:

The Boat Maker

China's big public release was about its prowess in the building of aircraft carriers. As industry watchers expected, the first ship was just a learning experience. General Dynamics (NYSE: GD) doesn't have a learning curve to deal with. It is an important and well established supplier to the U.S. Navy. If our allies want or need to bulk up in the water, this company may find itself called into action.

General Dynamics, however, is much more than a boat maker. It has expertise in the combat systems, information systems, and aerospace arenas, too. Of note is the company's Gulfstream jet business. While not a huge business line, it does provide a small counterweight to the military businesses.

Yielding around 3% with a long history of regular annual dividend increases, income investors might find this a solid option.

Airplanes and Arms

Although built by Bell Helicopter, a unit of Textron (NYSE: TXT), the Osprey is produced “under a strategic alliance” with Boeing (NYSE: BA). So, in one world hot spot, U.S. military suppliers are already benefiting. That said, Boeing's business is even more diversified than General Dynamics.

In fact, military sales account for only about 40% of the company's overall business, which includes sales to NASA. The company's commercial aircraft business, then, is a bigger issue for the company. For example, the grounding of the Dreamliner was a massive risk to the company's future.

However, Boeing's expertise in the aircraft arena is undisputed. It sells such military aircraft as the world famous F-15, among many others. It has notable offerings in unmanned drones, too. This is an increasingly important arena as countries look to keep human lives out of harms way. Investors seeking a widely diversified company that would benefit from military sales to our allies would do well to look at Boeing.

The Osprey Partner

Textron is also widely diversified. It sells helicopters, commercial aircraft, and industrial products. However, about half of its Bell Helicopter sales are to the military and its Textron Systems subsidiary is pretty much focused on the area. Thus, it is an important military supplier. The Osprey sale is early evidence of how arming our allies is proving a benefit.

Moreover, the company's Textron Systems division already generates about a quarter of its sales from Asia. It isn't much of a stretch to imagine that Textron would benefit from a bulking up in that region. Military sales make up around a third of the company's top line. Paying only a token dividend, it is most appropriate for investors seeking growth.

Cold War?

There is no way to know what is going to happen as China looks to project its political power more forcefully. One thing that is certain, though, is that The United States is a world leader with regard to military technology. If our allies in the region decide that they need to spend more on their military capabilities, the above diversified companies are likely to be beneficiaries.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics, Lockheed Martin, Northrop Grumman, Raytheon Company, and Textron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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