One CEO resisted, stating they did not want to be stuck with a warehouse full of rockets when the fighting stopped when the Pentagon summoned the largest defense contractors in the world to a meeting to order them to ramp up production shortly after Russia invaded Ukraine, according to three people with knowledge of the conversation.
Big defense companies are now behaving differently, nearly two years later. A number of them anticipate robust demand in 2024 as the United States and its allies stockpile costly weapons and ammunition in anticipation of what they see as more assertive behavior from China and Russia.
It’s easy math. For instance, the U.S. Army’s production of Patriot interceptors, which fire projectiles at approaching missiles in an attempt to drop them, will increase from 550 to 650 rockets annually to meet the need for missile defenses. With each system costing about $4 million, that might increase sales of one weapon system by $400 million annually.
Stronger demand will immediately trickle down to the company’s bottom line because boosting the production volumes of older systems is always more profitable than the large investment expenses associated with ramping up the production of new systems.
Wall Street believes that the largest defense companies’ shares, which have easily outperformed the benchmark S&P 500 stock index over the past two years, will continue to rise.
Over the next year, it is anticipated that shares of Lockheed Martin, General Dynamics, and Northrop Grumman will increase by 5% to 7%, while those of S&P will only slightly increase.
According to Eric Fanning, CEO of the U.S. Aerospace Industries Association, “adversaries are seeing our stockpiles starting thin and being depleted,” meaning that US weapons stockpiles were not “full” before Russia invaded Ukraine. Thus, fear of Russian aggression, Chinese aggressiveness, and the need to support friends in the Middle East are driving demand, he said.
ROCKET MOTORS AND PATRIOTS
The production of Patriot Systems can be dissected to illustrate how sales of staple goods would affect a variety of businesses. For starters, Lockheed Martin produces the newest generation of interceptor missiles, while RTX produces the radars and ground systems.
Production of launchers and control systems was increased by RTX to 12 units annually. The combined cost of radar and a rocket was about $400 million.
Over the next few years, Boeing plans to boost by more than 30% the number of sensors that are produced at its Huntsville, Alabama, factory. These sensors are used to guide Patriot missiles.
The backlog of solid rocket motors, which are required by the wide range of weapons that have been in high demand since Russia’s full-scale invasion of Ukraine in February 2022, is another indication of a significant demand for these weapons.
The two largest rocket motor manufacturers in the United States, Northrop Grumman and L3Harris Technologies, both reported higher demand.
According to Northrop, a large portion of the rise can be attributed to the increased need for its warheads and rocket motors in the Guided Multiple Launch Rocket Systems (GMLRS), which are widely utilized in Ukraine.
GMLRS rockets have 200-pound (90-kg) warheads and are GPS-guided. Lockheed Martin produces 10,000 missiles annually and plans to increase output to 14,000 shortly. Army documents state that they cost $148,000 on average per unit, and over 6,100 of them have already been shipped to Ukraine.
In an interview, Tim Cahill, the head of Lockheed’s Missiles and Fire Control division, which is a prime contractor for GMLRS and Patriot interceptors, stated, “Every day the munitions are being fired reinforces the need for substantive stockpiles.” “And I don’t see that going down.”
According to an official at a rocket motor manufacturer, President Joe Biden’s administration gave weapons priority in its budget proposal for the Pentagon for 2024.
After the $886 billion National Defense Authorization Act, or NDAA, defense policy law was passed, he anticipated that order backlogs would increase. Congress gave it their blessing last week, and Biden is anticipated to sign it into law.
