Defense Contractors Indispensable to the U.S. Military

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When looking to invest I always look for long-term future growth. The present demand for a current service and or product is fundamental in analyzing if a particular company is a solid investment or not.

The second largest industry in America is the U.S. Department of Defense (DoD). Fiscal year 2012 defense spending amounted to $850.7 billion. Government spending encompasses military, civil, veterans, foreign military aid, foreign economic aid and R&D defense. I am bullish on companies that support such major industries.

Future spending for defense

National security spending is high and will continue to increase in the 21st century due to ongoing conflicts around the world i.e. the Middle East. The Center for Arms Control and Non-Proliferation completed a fact sheet on war funding in 2008. The U.S. Congressional Research Service Data indicated $872.6 billion was spent on the supplemental war effort in Iraq and Afghanistan. War related spending went to the Department of Defense (DOD), the State Department, the Department of Veteran Affairs and U.S. military base upgrades and homeland security.

In 2013 the Obama Administration requested a base budget of $526.6 billion for just 2014. An additional $88.5 billion for Overseas Contingency Operations (OCO) was requested to continue the war effort in Afghanistan. Military spending has significantly increased since September 11, 2001 even though congress has attempted to curb military spending.

The military requires an infinite supply of ammunition

The largest provider of ammunition to the U.S. military and its allies is Alliant Techsystems (NYSE: ATK), an aerospace, defense and commercial products company. Located in Lake City, Missouri Alliant produced 1.6 billion rounds of small caliber ammo in 2012. Alliant currently employees 15,000 Americans with a market cap of $2.51 billion. March 30, 2012 net income was $2.9 billion for this defense company.

The U.S. Navy awarded a $223 million contract in June 2003 to develop their Advanced Anti-Radiation Guided Missile (AARGM). The AARGM is a medium range air to ground missile designed to target enemy air defenses. The guided missile can engage Integrated Air Defense (IAD) targets equipped with shutdown capability. Alliant was also awarded an additional $71 million contract from the U.S. Navy for full production of this air to ground missile. The AGM-88E will be deployed by the US Navy, US Marine Corps and the Italian Air Force, Italy's airforce ordered 90 F-35 Lightening II Joint Strike Fighters (JSF) from Lockheed Martin.

The AARGM missile system can be integrated onboard the Lockheed Martin F-35 Lightning II aircraft. Currently the missile is in use on the Boeing FA-18C/D Hornet, FA-18E/F Super Hornet and the EA-18G Growler aircraft.

Weapon detection system

On the defensive side of the equation Northrop Grumman Corporation (NYSE: NOC) received a $15.7 million modification contract from Army Contracting Command for the Vehicle and Dismount Exploitation Radar System (VADER). This advanced radar system can detect vehicles and humans with high resolution images and real time ground moving targets.

The main advantage of VADER is in detecting improvised explosive devices (IEDs) or landmines that target U.S. troops and ground vehicles. The deployment of this device should decrease mortality rates for U.S. personnel in hotspots around the world. The total value of this contract is worth $141 million according to Army officials.

Northrop predicts sales of $24 billion for FY2013, this should be an attainable goal considering all contracts are honored and not cancelled by the U.S. military industrial complex. If sales continue as expected an EPS of $6.85 - $7.15 is forseeable.

Long-term investment opportunity

Firearms and combat aircrafts require an infinite supply of armaments this is an established fact indicated by military investments. The companies summarized here cover offensive and defensive sides of the military establishment.  Ongoing worldwide escalations and the need for national security directly translates into the need for companies like ATK, Lockheed Martin and Northrop Grumman that mutually benefit each other.


Robert Palmer has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin and Northrop Grumman. 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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