US defence industry’s profit set to increase in 2024

When the Pentagon convened a meeting with the world’s largest defence contractors, urging them to increase production in the aftermath of Russia’s invasion of Ukraine, one CEO expressed reservations, citing concerns about ending up with surplus rockets once hostilities ceased, as per information from three individuals familiar with the discussion.

Fast forward nearly two years, and major defence companies have shifted their stance, anticipating robust demand in 2024. The U.S. and its allies are bolstering their arsenal of costly weaponry and munitions, anticipating heightened threats from Russia and China.

The calculations are straightforward. For instance, in response to the demand for missile defences, the production of Patriot interceptors for the U.S. Army—projectiles designed to intercept incoming missiles—will increase from 550 to 650 rockets annually. At approximately $4 million each, this translates to a potential annual sales increase of $400 million for just one weapons system.

Given that escalating production volumes of existing systems are more financially lucrative than the substantial upfront costs associated with expanding production for new systems, heightened demand is expected to swiftly impact corporate profits.

According to Wall Street estimates, shares of leading defence companies, which have consistently outperformed the S&P 500 stock index in the past two years, are projected to continue rising. Lockheed Martin, General Dynamics, and Northrop Grumman shares are predicted to experience gains between 5% and 7% over the next 12 months, outpacing the modest gains expected for the S&P.

Contrary to the notion that U.S. weapons stockpiles were brimming before Russia’s invasion of Ukraine, Eric Fanning, CEO of the U.S. Aerospace Industries Association, emphasizes that the stockpiles were not “full,” and there’s a perception of depletion. The surge in demand is attributed to Chinese aggression, concerns about Russian actions, and the need to support Middle Eastern allies.

Examining Patriot systems production reveals how sales of fundamental components impact various companies. For example, RTX manufactures radars and ground systems, while Lockheed Martin produces the latest generation interceptor missiles. With RTX increasing launcher and control system production to 12 units per year, a launcher and radar combination costs around $400 million each.

Boeing has committed to expanding its Huntsville, Alabama, factory production capacity for sensors guiding Patriot missiles by over 30% in the coming years.

The surge in demand is further evident in the backlog of solid rocket motors, essential for a wide range of arms in high demand since Russia’s full-scale invasion of Ukraine in February 2022. Northrop Grumman and L3Harris Technologies, the two primary rocket motor makers in the U.S., report increased demand.

Northrop attributes much of the rise to the demand for its rocket motors and warheads in the Guided Multiple Launch Rocket Systems (GMLRS), extensively used in Ukraine. Lockheed Martin, producing 10,000 missiles annually and increasing production to 14,000, is actively involved, with each missile costing an average of $148,000.

As emphasized by Tim Cahill, who oversees Lockheed’s Missiles and Fire Control business, a prime contractor for Patriot interceptors and GMLRS, the continuous firing of munitions underscores the necessity for substantial stockpiles, a trend he doesn’t anticipate diminishing.

An executive from a rocket motor manufacturer notes that the Biden administration prioritised munitions in its 2024 Pentagon budget request. Anticipating a surge in order backlogs post-contract approvals following the passage of the $886 billion defence policy bill (NDAA), the executive expects a favourable impact once the bill is signed into law by President Biden.