Is the defense industry headed for a downturn? Yesterday's JPMorgan downgrade of L-3 Communications (NYSE: LLL ) certainly makes it sound that way. But you know the old saying: When the going gets tough, the tough get going ...
... to Constantinople?
Recent weeks have given investors a glimpse into the defense industry's response to curtailed Pentagon spending, and it can be summed up in three simple (if otherwise disturbing) words: Middle East arms deals.
A couple weeks back, we discussed how Congress is reviewing a plan by Lockheed Martin (NYSE: LMT ) and Raytheon (NYSE: RTN ) to sell $7.8 billion worth of Patriot PAC-3 missiles to Turkey. Around the same time, The Wall Street Journal ran an editorial by Iraqi commentator and political analyst Omar Fadhil Al-Nidawi calling for similar sales to Iraq. On Wednesday, the companies revealed that there interest in make yet another multibillion-dollar sale in the region, this time to the United Arab Emirates (UAE).
Like Turkey -- and Kuwait, and Israel, and Saudi Arabia -- the UAE views Patriots as a means of bolstering its air defenses and warding off a growing threat from Iran. Last year, the UAE ordered $3.3 billion worth of Patriots. Cccording to retired Admiral Charles Moore, Lockheed's man in Abu Dhabi, the UAE's also in negotiations to spend another $7 billion to deploy Lockheed's Terminal High-Altitude Area Defense system (THAAD).
If it seems a little strange to hear of U.S. defense contractors making major sales of weapons systems to a region that's given us so much grief, well, it shouldn't. After all, the UAE is a key U.S. ally. It's swimming in oil money and spending it freely on weapons systems. Over the last five years, the country has spent more on arms imports than any other nation on Earth, China and India excepted. For reference: the population of India is 1.2 billion, China is 1.3 billion, and the UAE is less than 5 million.
So I submit to you that UAE probably wins the title of grand champ of the world for per capita weapons spending.
The more actively Secretary of Defense Gates wields the Pentagon budget axe, the more active we're going to see contractors like Lockheed and Raytheon -- and Boeing (NYSE: BA ) , Northrop Grumman (NYSE: NOC ) , and Textron (NYSE: TXT ) -- getting in the Mideast.
Are Mideast arms sales bad U.S. government policy -- or just good business? Post your thoughts below.