In a startling development, this month saw the U.S. Defense Security and Cooperation Agency notify Congress of three separate planned foreign arms sales of Hellfire missiles to U.S. allies around the globe -- all in the course of a single week. Specifically, the Pentagon seeks approval to sell 356 AGM-114K/R3 Hellfire missiles to Egypt, worth $57 million, and more than 500 combat and training Hellfire missiles for South Korea, valued at $81 million. Meanwhile, Pakistan takes the prize, with authorization pending to buy 1,000 AGM-114 Hellfires.
Bundled with a shipment of 15 AH-1Z "Viper" attack helicopters from Textron (NYSE:TXT), 32 T-700 GE 401C Engines from General Electric (NYSE:GE), and other associated equipment from companies including Boeing (NYSE:BA), the Pakistan contract should be worth a whopping $952 million to the contractors involved -- bringing the total value of these three arms deals to $1.09 billion.
Why are all of these countries buying all of these missiles? The reasons vary.
According to DSCA, Egypt will use its Hellfire missiles "as a deterrent to regional threats and to strengthen its homeland defense." South Korea's goal is to "supplement its existing missile capability and current weapon inventory ... and deter regional threats." Meanwhile, the sale of missiles to Pakistan -- more than will be shipped to Egypt and South Korea combined -- will "provide Pakistan with military capabilities in support of its counterterrorism and counter-insurgency operations in South Asia" and, in particular, will "enhance [Pakistan's] ability to conduct operations in North Waziristan Agency, the Federally Administered Tribal Areas, and other remote and mountainous areas in all-weather, day-and-night environments."
In short, it's a dangerous world out there. Whether it's Egypt arming up for conflict with ISIS in Libya and Houthi insurgents in Yemen, South Korea worrying about its neighbors to the north, or Pakistan trying to pacify its troublesome Taliban-infested hinterlands, a lot of countries are interested in buying a lot of weapons to combat their individual threats.
What it means to investors
And as recent headlines tell us, these threats aren't going away anytime soon. Egypt in particular is caught between a proverbial rock-and-hard place, as Libya devolves into violence on the one hand, and an Arab coalition-of-the-willing forms to try to restore peace to Yemen. South Korea and Pakistan's problems have been going on even longer than that -- with no end in sight.
This is bad news for these countries. But it's good news for the companies that make the weapons -- and will continue making them so long as there's a need -- and for the investors who own their stock. What's more, it further illustrates the need for investors to keep track of which firms are doing the best job of winning market share in the Middle East, and also in Southeast Asia.
In this regard, Boeing (much of whose revenues come from civilian markets, which clouds the issue somewhat) saw a 7% increase in the proportion of its sales coming from outside U.S. borders last year. GE and Textron, in contrast, drew less of their revenues from international customers last year than they did in 2013.
The single company benefiting most from this month's arms-buying surge, however, has to be Lockheed Martin -- which incidentally grew the proportion of its revenues coming from outside U.S. borders by 16% last year. Sure, the dollar values for Lockheed are small -- probably less than $300 million across all three deals, or less than 1% of annual sales at the defense giant. Still, according to S&P Capital IQ data, Lockheed Martin makes more profit off sales from its Missiles and Fire Control division, which makes the Hellfire, than it does at any of its other four main business divisions -- a staggering 16.9% operating profit margin.
Dollar for dollar, therefore, these are exactly the kinds of sales investors should want to see Lockheed make. Simply put, they're a "Hell" of a good way for Lockheed Martin to make a profit.