In a brief national address on Wednesday, Russian President Vladimir Putin reiterated his willingness to use nuclear weapons to escalate the invasion of Ukraine. US defense stocks rose in early trade as Putin ordered his military reserve forces to mobilize, blamed the West for the conflict and accused NATO countries of planning to use weapons of mass destruction against Russia.
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“Russia will use all the tools at its disposal to counter a threat to its territorial integrity – this is not a bluff,” he said.
The speech, in which Putin alluded to Russia’s nuclear arsenal, came a day after the Swedish arms monitoring group Stockholm International Peace Research said the nuclear weapons market is expected to skyrocket. It also said the risk of nuclear conflict – with the US, Russia and China all poised for conflict – is at its highest level since the Cold War.
The combination sent US defender names sharply higher on Wednesday. The push sent names including Lockheed Martin (LMT), General dynamics (GD) and Raytheon Technologies (RTX) is up more than 2% before earnings retreated following Federal Reserve rate hike news. Northrop Grumman (NOC) also rose 2% in the heavy trade and made a breakout to new highs.
Spending on nuclear weapons is increasing
The world’s number of nuclear warheads has steadily declined since its peak in 1986, when the total inventory was 70,374. The current figure is around 12,705. An estimated 3,732 of these are deployed with emergency responders. According to SIPRI, however, this trend has already reversed.
A report released this week by Research & Markets estimates the global market for nuclear bombs and missiles at $72.64 billion by 2020. It predicts that sales of such weapons will grow by 79% to $126.34 billion by 2030. dollars will rise. And with spending rising, there’s a lucrative market for defense leaders like Northrop, Raytheon and Lockheed Martin.
Who has all the nuclear weapons?
The US continued to dominate the global nuclear bomb and missile market in 2020. But China’s market share is expected to grow significantly over the next decade.
Global spending on nuclear weapons increased to $82.4 billion in 2021, according to the Nobel Prize-winning group International Campaign to Abolish Nuclear Weapons. Almost half of that came from the US, which spent $44.2 billion on nuclear weapons. Next was China with $11.7 billion.
While China was the second largest donor, the US and Russia held the largest supplies. In 2021, the US and Russia had 5,550 and 6,255 nuclear warheads, respectively. They are expected to reach 6,380 and 6,734 respectively by 2030.
By weapon type category, submarine-launched ballistic missiles (SLBMs) hold the highest market share in 2022. The segment is expected to be the leader for the forecast period. In terms of range, the “greater than 5,000 km” segment is expected to lead the market. The active status segment is projected to grow at a lucrative rate from 2021 to 2030, according to the ResearchAndMarkets report.
Defense stocks “well positioned”
Defense stocks like “NOC, LMT and RTX are very well positioned to benefit from increased nuclear missile-related funding,” said Ken Herbert, an analyst at RBC Capital. RBC Capital said it has a number of affiliates that provide services to Lockheed, Northrop Grumman and Raytheon when they comment.
In a recent research note on equities, RBC Capital Markets said it expects nuclear weapons financing to remain well supported. It currently models that revenue from the national defense budget will grow 3% through 2027, with a 7% increase in missiles and ammunition over that time.
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According to a 2019 report by the Congressional Budget Office, the US plans to spend $50 billion annually on its nuclear forces through 2028.
RBC noted that Northrop Grumman is “best positioned to benefit from continued nuclear recapitalization efforts.” and L3Harris (LHX), General Dynamics and Lockheed Martin will benefit from larger international sales as NATO countries increase funding.
According to ICAN data, 15 new nuclear weapons contracts worth more than $30 billion were awarded in 2021. This compares to $14.8 billion in contracts awarded in 2020. Most of the multi-year contracts were for the Trident or Minuteman III systems and are expected to last until 2040. Northrop Grumman was awarded three new contracts worth $23 billion that run through 2040.
International arms sales
From 2017 to 2021, global arms transfers fell by 4.6% compared to the previous five-year period, SIPRI data shows. This is still an increase of 3.9% compared to 2007-2011. The top five major arms importers over the past five years have been India, Saudi Arabia, Egypt, Australia and China. Together they accounted for 38% of total arms imports. While the top five exporters for the period were the US, Russia, France, China and Germany. These five countries accounted for 77% of total arms exports.
The US has increased military aid to Ukraine and Taiwan, angering Russia and China. Separately, US-based defense contractors also have other big international deals that draw the wrath of foreign nations.
Lockheed Martin has more than 50 global partnerships. These include Taiwan, Great Britain, the Republic of Korea, Japan, Saudi Arabia and the United Arab Emirates. Northrop Grumman works with 25 different nations. Other major arms dealers, including Raytheon and L3Harris, get important overseas orders.
In February 2022, China sanctioned Lockheed and Raytheon over their dealings with Taiwan, which for Lockheed go back decades.
In addition to sales of missiles, defense and nuclear warheads, much of the spending goes into lobbying. The 2021 ICAN report also found that arms manufacturers spent millions lobbying for defense. Every $1 spent on lobbying generates an average of $256 in new nuclear weapons contracts.
Nuke Sales Supervision
The U.S. Department of State’s Bureau of Political-Military Affairs oversees most government-to-government arms sales and commercial export licenses for domestically manufactured defense equipment and technology. Under the department, it manages approximately $55 billion in foreign military sales (FMS) of new defense equipment to allies. The bureau’s Directorate of Defense Trade Controls issues regulatory approvals for $115 billion a year in commercial sales and services.
Global arms regulations were first introduced in 2013 when the United Nations passed the Arms Trade Treaty. The treaty set international standards for arms transfers and promoted accountability and transparency. The UN banned the transfer of weapons that could be used to commit genocide or war crimes. However, the treaty requires each state to enforce its transfers and compliance.
Defense stocks in focus
Defense stocks have generally outperformed the market this year. LMT stock is up 21% year-to-date, while NOC stock is up nearly 31%. RTX stock, on the other hand, is up just 1.3% in 2022.
NOC stock broke into a buy zone on Wednesday, behind an alternative buy point of 497.30. Previously, shares broke out of a double bottom base on Aug. 5. The buy zones extend 5% beyond the buy points.
NOC stock has a 94 RS rating, indicating strong performance against the S&P 500 over the last 12 months. And it has a composite rating of 85 out of a possible 99. The composite rating combines a number of technical and fundamental indicators into one assessment. However, NOC’s EPS rating is only 73 as Northrop Grumman has reported a year-over-year decline in earnings for the past three quarters.
Follow Harrison Miller on Twitter for more stock news and updates @IBD_Harrison
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