On May 1, 2003, President George W. Bush stepped onto the deck of an American aircraft carrier and proudly declared that "Major combat operations in Iraq have ended."
Seven years later, President Barack Obama made much the same boast, declaring "the American combat mission in Iraq has ended."
Fast-forward four more years, and while dozens of American combat jets are still bombing targets in Iraq, it is true that we no longer have "boots on the ground" (aside from 3,000 or so "advisors"). But pretty soon, we'll have something else on the ground: tanks.
And armored cars, too. Hundreds of them.
Back in the I.R.A.Q.
Just before the start of the holidays last month, the U.S. Defense Security Cooperation Agency (the DSCA -- the Pentagon office responsible for coordinating military arms sales between U.S. defense contractors and foreign buyers) notified Congress of two planned arms deals aimed at bolstering Iraq's ability to fight the ISIS insurgency.
Combined, the two deals call for selling to Iraq:
- 1,000 M1151A1 up-armored Humvees, outfitted with M2 .50-caliber machine guns and MK-19 40 mm grenade launchers
- 175 M1A1 Abrams main battle tanks
- 15 M88A2 Hercules tank recovery vehicles (used to salvage damaged tanks)
- 55,000 rounds of 120 mm ammunition for the tanks
The total cost of the two arms deals should come to just under $3 billion. Granted, congressional approval is necessary before either sale can be finalized. But Congress has never rejected an arms deal proposed by DCSA.
These arms deals would provide a nice revenue boost to the defense contractors that build these weapons -- General Dynamics (NYSE:GD) for the Abrams, Britain's BAE Systems for the Hercules, and Indiana-based AM General for the Humvees. (In General Dynamics' case, the estimated $1.4 billion cost of building 175 main battle tanks would be equivalent to about 23% of annual revenue at the company's combat systems business, according to data from S&P Capital IQ.)
These deals would also continue a trend we saw all throughout 2014, in which DSCA-sponsored arms sales to Iraq included:
- 500 Hellfire missiles, worth $82 million to Lockheed Martin
- 12 Bell 412 EP helicopters, worth $300 million to Textron
- 50 of BAE's M1135 Stryker armored reconnaissance vehicles (a $900 million deal)
- 24 AH-64E Apache Longbow attack helicopters, plus hundreds more Hellfires -- altogether worth an estimated $6.2 billion to Boeing
What it means to investors
Here at The Motley Fool, we're as interested in keeping up with the situation in Iraq as anyone else -- but our real challenge is in figuring out how events over there affect investors' portfolios over here. In that regard, Iraq's purchase of General Dynamics' M1A1 battle tanks takes on special importance.
This is about more than just immediate sales and profits for General Dynamics, you see. Currently, the U.S. Army has all the M1A1 tanks it needs. (Maybe more than it needs. Just few years back, the U.S. government sealed a deal to give away 400 older M1A1s to Greece -- gratis). But if the Army doesn't need new tanks, and if General Dynamics can't find other customers, then the company might have to halt tank production.
Weak demand has already resulted in the layoff of hundreds of workers at the company's Abrams tank factory in Lima, Ohio. Last year, General Dynamics successfully lobbied Congress to provide $120 million for upgrading Abrams tanks, just to ensure the factory remains at least partially open (and avoid having to pay the expense of restarting production from zero at a later date). In 2012, similar logic caused Congress to spend about $180 million on the tanks, despite Army Chief of Staff Gen. Ray Odierno telling lawmakers at the time: "Our tank fleet is two and a half years old on average now. We're in good shape, and these are additional tanks that we don't need."
Luckily for General Dynamics, though, Iraq does need tanks. And at the Lima plant's recent production rate of 10 tanks per month, the Iraq order should keep General Dynamics' tank business running well into 2016.
Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Textron,. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.
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