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Sunday, March 15, 2015

Bombs Away! War In Iraq Could Mean $1.5 Billion Windfall for Defense Contractors

Wars are expensive, and America’s war against ISIS is no exception.

When we last looked at the cost of U.S. support for the fight against ISIS n Iraq and Syria, in early October 2014, I estimated that the U.S. had spent about $800 million, and was on track to spend billions of dollars more as the war dragged on. The latest numbers quoted by The Atlantic, relying on data reported by Reuters and estimates from the Center for Strategic and Budgetary Assessments, confirm this.
From Aug. 8 through Dec. 11, the U.S. spent $1.02 billion on combat operations against ISIS, and is spending at the rate of $8.1 million per day, according to The Atlantic. Much of that money was spent on weapons being drawn down from existing Pentagon inventory. A new report from Defense One, though, suggests the cost of the war is about to more than double.
I’ll see your $1 billion, and raise you $1.5 billionOver the past six months, the U.S. military and its allies have struck nearly 2,700 targets in Iraq, deploying more than 3,000 bombs and missiles in the process — primarily Joint Direct Attack Munitions manufactured by Boeing  (NYSE: BA  ) , and Hellfire missiles built by Lockheed Martin  (NYSE: LMT  ) . Sounding the alarm that the U.S. might not have “enough bombs and missiles to continue striking Islamic State strongholds in Iraq and Syria,”Defense One reported last week that not only the “U.S. military,” but also those of our allies, are “re-evaluating the size of their bomb stockpiles.”
Over six months’ time, the Pentagon has dropped thousands of JDAMs on ISIS targets. Photo: Boeing.
According to Lt. Gen. James Holmes, Air Force deputy chief of staff for strategic plans and requirements, while the U.S. isn’t yet “running out of weapons,” it is “using weapons at a pretty good rate in northern Iraq and in Syria.” Pretty soon, it will be necessary to replenish the stockpiles. In fact, Pentagon acquisitions chief Frank Kendall went so far as to say that “obviously they have to be replaced.”
At last report, the U.S. Air Force had requested $559 million in funding to purchase nearly 13,000 Joint Direct Attack Munitions, and a further $700 million to buy 5,567 Hellfire missiles — and that’s just one military branch. Last month, the U.S. Army awarded Lockheed a $144 million contract to build 2,060 Hellfiresfor U.S. allies Saudi Arabia, Qatar, Jordan, Iraq, Egypt, and Australia — several of which are assisting with the fight against ISIS.
The month before that, the Navy placed a $139 million order with Raytheon (NYSE:RTN  ) to supply it with 100 Tomahawk cruise missiles. (Which we can use up pretty quick. On the first day of combat operations against ISIS in Syria, for example, the Navy expended 47 Tomahawks — at $1.4 million a pop).
Tally up all these costs, and the price of replacing ordnance expended already tops $1.5 billion — and this isn’t even a complete list. For example, word has it Navy fighter jets also use bombs and missiles on occasion.
What it means for investorsIf this cost helps to save innocent lives in countries threatened by ISIS, to protect world cultural heritage sites from ISIS bulldozers, and to defend U.S. interests in the region, it may be worth the money.
From an investor’s perspective, though, news of the massive increase in weapons purchases needed to keep the bombs dropping on ISIS means just one thing: additional revenue streams pouring into munitions makers Boeing, Lockheed Martin, and Raytheon. But how much additional revenue are we talking about here?
Well, crunching the data from S&P Capital IQ, we come up with combined annual revenue of $159.2 billion annually for Boeing, Lockheed, and Raytheon. Just the weapons purchases that we know about amount to about a 1% increase in overall revenue at these defense contractors. When you consider that analysts only project about 10%-ish annual growth from these companies going forward, a 1% increase is already enough to move the needle on these businesses.
What’s more, Pentagon acquisitions chief Kendall said, in his view at least, “We’re engaged in a conflict now that will probably go on for some time.” So $1.5 billion could be just the beginning.
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One single Hellfire missile can give ISIS a very bad day. So what will 5,567 Hellfires will do? Photo:Wikimedia Commons.