Defense stocks flourish after Russian invasion of Ukraine

As one would expect, Russia’s war in Ukraine has fueled international growth for defense products as nations seek to protect their borders and those of NATO, as well as support allies. Security is now front and center of political discussions around the world, and governments have responded by allocating several hundred-billion dollars for equipment and supplies to combat this threat. Though some lawmakers argue about the cost, the majority understand supplying weapons and supplies to Ukrainian forces is a preferable option to putting U.S. and NATO troops directly in harm’s way.

In response to the increased attention to the sector and a fiscal 2024 proposed U.S. defense budget topping $842 billion (excluding any supplemental war-related spending and Ukrainian aid), investors have increased the amount of publicly traded defense stocks they hold in their portfolios.

The 54 U.S.-listed, publicly traded companies found in the SPADE Defense Index now have a total market capitalization of $1.25 trillion. Investment funds have seen their assets under management grow significantly in the past 18 months, with the Invesco Aerospace and Defense ETF (NYSE: PPA) tripling to nearly $2 billion.

During 2022, the aforementioned benchmark index gained 8.6%, outperforming the broader U.S. market by 28%. This rise was led by Allegheny Technologies (+87%), Maxar Technologies (+75%) and Northrop Grumman (+41%). Even with the broader U.S. market down nearly 20%, more than 4 in 10 defense stocks saw their share price increase by double digits in percentage.

Despite these gains in the stock market, total revenues of the firms found in this year’s Defense News Top 100 remained relatively flat at $534 billion. This apparent contradiction actually bodes well for the coming quarters and the next few years.

During much of 2022 and early 2023, many of the large prime systems manufacturers cited supply chain disruptions that led to an inability to increase production of weapons systems and equipment at the levels needed to supply Ukraine’s war effort and restock national assets. Although this has reduced anticipated deliveries in the near term and, thus, prevented firms recording revenues, a return to normal operations as these issues are overcome should lead to revenue boosts as more orders are fulfilled.

Still, there is a major challenge to the sector that could derail deliveries as 2023 progresses. Smaller, private defense subcontractors and suppliers are facing dire cash flow issues, as they have been impacted by the intersection of material and parts inflation, supply chain issues, and increased staffing costs. Faced with the need to renegotiate fixed-price contracts, some might consider walking away, which would put added pressure on prime contractors to meet delivery schedules.

Additionally, the Economic Price Adjustment-Labor and Material clause of the Federal Acquisition Regulation — meant to compensate for extraordinary inflation and supply costs via adjusted contracts — has been slow to come into play, as the paperwork from the large contractors and the necessary Pentagon approvals move slowly through the department’s procurement procedure.

For example, a chief executive of a small, 150-person firm described to me the challenges of procuring radiation-resistant capacitors and semiconductor chips. Small batch, specialized orders for space and defense missions are not prioritized before larger purchases placed by the automobile sector, this executive said.

Additionally, pricing for items such as capacitors are up 300%, lithium-dominant materials are up 400%, and the cost to maintain technical staff has increased by much more than the headline inflation rate — the latter being a symptom of the booming space sector as well as defense.

Larger firms, like those on the Defense News Top 100, have access to capital and likely can weather these cash flow issues. However, in the latter half of this year, it is very possible we will see a spike in mergers and acquisitions as larger firms take over the subcontractors and supply chain partners that they deem systemically important.

Despite these challenges, the performance of defense sector stocks is driven as a reaction to our perception of fear and stability. The activity in Ukraine is but one of a number of global and local threats from which companies operating in the sector benefit. The conclusion of hostilities in Ukraine will see Western nations focusing on restocking and reevaluating their needs for the future and determining how to counteract the enemies and threats that remain.

The Defense News Top 100 list contains 73 publicly traded companies that represent 79% of the list’s total revenues for 2022. Through June 30, 2023, the SPADE Defense Index has gained another 8.1% and is at a historic high.

Such performance is not atypical : Over the past 23 years, the sector outperformed in 17 of them, many times by double digits. In the coming quarters and years, we believe that the sector remains poised for continued growth.

Scott Sacknoff manages the SPADE Defense Index , a modified capitalization-weighted index made up of companies operating in the defense, homeland security and government space sectors.

正如人们所预料的那样，俄罗斯在乌克兰的战争推动了国际防务产品需求的增长，各国都在寻求保护自身及北约边界，并支持盟友。安全问题如今已成为全球政治讨论的焦点，各国政府也纷纷拨款数千亿美元用于装备和物资，以应对这一威胁。尽管一些议员对成本存在争议，但大多数人认为，向乌克兰军队提供武器和物资比将美国和北约部队直接置于危险境地更为可取。

由于该行业受到越来越多的关注，以及2024财年美国拟议的国防预算超过8420亿美元（不包括任何补充的战争相关支出和对乌克兰的援助），投资者增加了他们在投资组合中持有的公开交易的国防股票的数量。

SPADE国防指数包含54家在美国上市的上市公司，目前总市值达1.25万亿美元。过去18个月，投资基金的资产管理规模显著增长，其中景顺航空航天与国防ETF（NYSE: PPA）规模增长近三倍，接近20亿美元。

2022年，上述基准指数上涨8.6%，跑赢美国大盘28%。其中，阿勒格尼技术公司（Allegheny Technologies，+87%）、马克萨技术公司（Maxar Technologies，+75%）和诺斯罗普·格鲁曼公司（Northrop Grumman，+41%）领涨。尽管美国大盘下跌近20%，但超过四成的国防股股价仍实现了两位数的百分比涨幅。

尽管股市有所上涨，但今年《防务新闻》百强企业榜单上的所有公司总收入仍保持相对平稳，为5340亿美元。这种看似矛盾的现象实际上预示着未来几个季度乃至几年的良好前景。

在2022年的大部分时间和2023年初，许多大型主系统制造商都指出，供应链中断导致他们无法将武器系统和装备的产量提高到足以支持乌克兰战争和补充国家资产所需的水平。尽管这在短期内减少了预期交付量，从而导致公司无法确认收入，但随着这些问题的解决，业务恢复正常后，随着更多订单的完成，收入应该会随之增长。

然而，随着2023年的推进，该行业仍面临一项可能影响交付的重大挑战。规模较小的私营国防分包商和供应商正面临严峻的现金流问题，因为它们受到材料和零部件价格上涨、供应链问题以及人员成本增加等多重因素的冲击。面对重新谈判固定价格合同的必要性，一些供应商可能会考虑退出，这将给主承包商带来更大的压力，迫使它们按时交付。

此外，《联邦采购条例》中的“经济价格调整-劳动力和材料条款”（旨在通过调整合同来补偿异常的通货膨胀和供应成本）一直未能发挥作用，因为大型承包商的文件和必要的五角大楼批准在国防部的采购程序中进展缓慢。

例如，一家仅有150名员工的小公司的首席执行官向我描述了采购耐辐射电容器和半导体芯片所面临的挑战。这位高管表示，用于航天和国防任务的小批量、特殊订单，其优先级低于汽车行业的大宗采购。

此外，电容器等物品的价格上涨了 300%，锂基材料的价格上涨了 400%，维持技术人员的成本增长幅度远远超过了总体通货膨胀率——后者是蓬勃发展的航天领域和国防领域的一个症状。

像《防务新闻》百强企业那样的大型公司拥有充足的资金，很可能能够渡过这些现金流难关。然而，今年下半年，随着大型公司收购它们认为具有系统重要性的分包商和供应链合作伙伴，我们很可能会看到并购活动激增。

尽管面临这些挑战，国防板块股票的表现仍然受到我们对恐惧和稳定的感知所驱动。乌克兰局势只是众多全球和本地威胁之一，而国防企业却能从中受益。乌克兰冲突结束后，西方国家将着重于补充库存，重新评估未来的需求，并确定如何应对仍然存在的敌人和威胁。

《防务新闻》评选的百强企业榜单包含 73 家上市公司，这些公司占榜单 2022 年总收入的 79%。截至 2023 年 6 月 30 日，SPADE 防务指数再上涨 8.1%，创历史新高。

这种表现并非个例：过去23年中，该行业有17年跑赢大盘，其中许多年涨幅达到两位数。我们相信，在未来几个季度和几年里，该行业仍将保持持续增长的势头。

Scott Sacknoff 管理 SPADE 国防指数，这是一个经过调整的市值加权指数，由在国防、国土安全和政府航天领域运营的公司组成。