Rising International Tensions Are a Tailwind for This Storied Defense Contractor
China is once again warning about its "red lines" when it comes to Taiwanese independence...
According to a report from Reuters, last week a Chinese government official said the country would take "drastic measures" if Taiwan pushed for independence. The official said that China has tried to keep its reunification with Taiwan peaceful but would take the necessary steps if Taiwan crossed any "red lines" set forward by the government.
The issue of Taiwan's independence has been one of the biggest flashpoints for U.S.-China relations in recent years. And the U.S. is preparing for any aggressions from China.
President Joe Biden just authorized a jump in military spending.
Last week, he signed the National Defense Authorization Act ("NDAA") into law. The NDAA, which passed through Congress with bipartisan support, approves a $768 billion defense budget for 2022, representing a 5% increase from the year prior – even more money than Biden had asked for.
One of the biggest pieces of the NDAA sets out to tackle the China problem...
According to the New York Times, the bill includes funds to counter China's military expansion. The $7.1 billion "Pacific Defense Initiative" prioritizes "maintaining and extending our military advantages" over China.
The government will always look to maintain or increase the defense budget. Considering the growing number of military threats – like China, Russia, Iran, and North Korea (to name a few) – it is too important to let the defense budget dwindle.
And that's a tailwind for today's company...
Lockheed Martin (NYSE: LMT) is a global aerospace, security, and technology company... and the largest defense contractor in the world. If there's a project underway and a contract to be awarded, Lockheed Martin is in the room. Over the past 12 months, it brought in $66 billion in revenue. The U.S. government accounts for a large chunk of its sales.
Lockheed pioneered early aircraft back in the 1940s. The company built more than 10,000 P-38 fighter planes to fight in World War II. It also developed the U-2 spy plane, launched in 1957 and still operational today.
Lockheed divides its business into four segments: Aeronautics, Missiles and Fire Control, Space, and Rotary and Mission Systems.
Its largest segment is its Aeronautics arm, accounting for about 40% of its sales. Lockheed sells aircraft to the military through this business. This segment is best known for the F-35 Lightning II Joint Strike Fighter, which Lockheed sells to the U.S. military and its allies around the world.
The Rotary and Mission Systems business is the second-largest revenue generator for Lockheed, accounting for about 25% of its sales. This segment builds and sells helicopters. In November 2015, Lockheed bought Sikorsky Aircraft – a leading manufacturer of helicopters for the military and maker of the Black Hawk helicopter – for $9 billion from aerospace and industrial equipment maker United Technologies.
Lockheed's Space division, which accounted for 18% of sales last year, includes Global Positioning System ("GPS") satellites, intercontinental ballistic missiles, and other satellites.
And the Missiles and Fire Control division makes up about 17% of sales. This segment designs and builds missiles for air-to-ground strikes and systems that defend against incoming threats.
The government relies heavily on Lockheed's products. Its backlog – which measures orders not yet delivered – stands at $135 billion. While this is down from its backlog at the start of 2021, Lockheed continues to win contracts left and right. Over the past month, it locked in more than a dozen contracts from NASA, the Army, and the Navy.
It also has authorization to sell aircraft to other U.S. allies, including Greece and Finland. So it could have more orders on the way very soon.
Lockheed's history speaks for itself. It has been a leading defense contractor for years. It has more than 12,500 patents, which help the company maintain its technological advantage. And it continues to develop new technologies and grow through acquisitions to make sure it keeps this advantage. That's a big reason why the military turns to Lockheed whenever it needs an upgrade.
With a steadily growing military budget, more of this money should flow onto Lockheed's income statement. That will support a move higher in the shares.
Sometimes investing is simple.