Please ensure Javascript is enabled for purposes of website accessibility

Will China's New Aircraft Carriers Spark a Multibillion-Dollar Weapons-Buying Bonanza?

By Rich Smith – Feb 22, 2014 at 9:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

As China builds a fleet of carriers, Australia is buying a fleet of spyplanes to watch them.

China's first aircraft carrier, the Liaoning (PLAN CV-16). Source: Author photo, with credit to Google Earth.

China has an aircraft carrier -- but that's not all it's got.

Last month, we outlined for you China's plans to take its first, experimental aircraft carrier, the Liaoning, and build upon it a new blue water Navy boasting perhaps as many as four separate, full-sized aircraft carriers. It's what the country intends to do with these ships that's making its neighbors nervous.

This week, The Wall Street Journal reported on recent maneuvers by a Chinese "flotilla" consisting of two guided missile destroyers, an amphibious attack ship, and a presumed escort of unseen submarines. Maneuvering south past Vietnam, then circling through the territorial (but still international) waters among several Indonesian islands, east, north of Australia, and finally passing 'round the Philippines (where they conducted live-fire exercises), China gave its neighbors a show of real naval strength. It also set people to thinking: Next time, those could be carrier strike groups cruising off shore...

All of which could of course be completely innocuous. According to statements by the People's Liberation Army Navy, China's fleet spent much of its time on the recent maneuvers engaged in such benign activities as "anti-piracy" and "search-and-rescue" exercises.

And of course, we take them at their word on that. But as a wise man once said...

"Trust, but verify"
Down under in Australia, better safe than sorry is the order of the day. And just to make sure that everything's kosher in the waters surrounding it, the Australian Defence Force confirmed Friday its latest efforts to keep an eye on goings-on. Specifically, Australia has agreed to buy at least eight, and possibly as many as 12, of Boeing's (BA 2.01%) P-8A Poseidon maritime surveillance aircraft. This sale will bring Boeing at least $3.6 billion in incremental revenue, and perhaps as much as $5.4 billion if all options are exercised. Australia will use the planes to upgrade an air fleet that currently relies primarily on Cold War-era AP-3C Orions from Lockheed Martin (LMT 0.50%).

Boeing's P-8A Poseidon (left), and the plane it's replacing, a P-3C Orion (right). Photo: Boeing.

Farther down the line, Australia also hopes to purchase multiple Triton long-range patrol drones that Northrop Grumman (NOC 1.39%) is developing for the U.S. Navy. The system is not fully operational just yet. But once it is, it might look something like this ...

Northrop Grumman's Global Hawk Maritime Demonstration aircraft. Photo: Northrop Grumman.

... and might cost something on the order of $80 million apiece.

The upshot for investors
I've said it before, and I'll say it again: Australia's rearmament offers one of the best growth markets for defense spending currently available to U.S. defense contractors. Boeing looks ideally positioned to grab a good chunk of the tens of billions of billions dollars that Australia has budgeted for defense spending over the next decade. In addition to the Poseidon sale announced this week, Boeing is in line to win a $1.5 billion contract to sell the Royal Australian Air Force a dozen of Boeing's EA-18G Growler electronic warfare aircraft.

Other winners in the Australian defense market could include Raytheon (RTN), now bidding to help build a space "fence" to track orbital debris around the earth, and local defense concern Austal (AUTLY), which is the prime contractor on a fleet of Armidale-class patrol boats that Australia is building.

And then there's Northrop Grumman. As the leader in the field of long-endurance unmanned "drone" aircraft, Northrop has pole position to sell Australia the maritime reconnaissance drones that it will be needing to monitor Chinese maneuvers to the north. Northrop Grumman has also made a series of savvy buys into local defense companies, including its acquisition of the defense business of Qantas airlines -- arguably Australia's best-known company -- last year.

If I had to pick just one company to play this trend, it would be Northrop Grumman.

Flying military kangaroos? Buy, buy, buy! Photo: Wikimedia Commons.

Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin, Northrop Grumman, and Raytheon. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Boeing Stock Quote
$178.36 (2.01%) $3.51
Raytheon Stock Quote
Lockheed Martin Stock Quote
Lockheed Martin
$483.46 (0.50%) $2.39
Northrop Grumman Stock Quote
Northrop Grumman
$527.83 (1.39%) $7.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.