"I'm running for president because I want a new foreign policy; one that ... works around a major coalition of wealthy and powerful nations supporting Muslim troops on the ground. That's the kind of coalition we need and that's the kind of coalition I will put together."
-- Sen. Bernie Sanders
"You know, when Senator Sanders talks about a coalition, I agree with him about that. ... I believe if we lead an air coalition, which we are now in the position of doing ... we can be successful in destroying ISIS."
-- Secretary of State Hillary Clinton
At the Democratic presidential debate Saturday, both of the leading candidates -- Sen. Bernie Sanders and Secretary of State Hillary Clinton, called for the formation of a Muslim coalition to fight ISIS on the ground, while the U.S. and Western allies lend support from the air.
Turns out, Saudi Arabia is on the same page.
Just days before the leading Democratic candidates for president held their debate, Saudi Arabian Deputy Crown Prince and Defense Minister Mohammed bin Salman announced he is setting up an "Islamic military alliance" to combat ISIS. In contrast to the candidates, who steadfastly refuse to put U.S. troops on the ground in Syria in significant numbers, the Defense Minister confirmed that "nothing is off the table" regarding actions the alliance might take to combat ISIS.
According to the Saudis, 34 countries have already signed on to the new alliance, including such nations as Jordan, Kuwait, Qatar, and the United Arab Emirates. Egypt and Turkey have the largest and third-largest populations in the Middle East, respectively -- and will soon have aircraft carriers in their navies -- and they, too, have signed on. Iran did not. Nor did Iraq, which is now closely allied with Iran. But the Saudis noted that "ten other Islamic countries have expressed their support for this alliance and will take the necessary measures."
The alliance will be headquartered in Riyadh, from which the Saudis will "coordinate and support military operations to fight terrorism and to develop the necessary programs and mechanisms for supporting these efforts."
Is this as big a deal as its sounds?
That was pretty much it for specifics. While the Saudis promised that their new alliance will "coordinate and support" military operations, they did not actually describe any particular operations they plan to conduct. That said, at least a groundwork for future action is being laid. Just signing up allies is a good first start -- and it has real-world implications for investors.
First, and most obviously, for an alliance to be effective, it needs weapons -- weapons that U.S. defense contractors can provide.
Many of Saudi Arabia's new allies are well armed already. As we've noted in the past, defense contractors Raytheon (NYSE:RTN) and General Dynamics (NYSE:GD) both get significant portions of their income streams from the Middle East. General Dynamics landed a $13 billion light armored vehicles contract with Saudi Arabia last year -- vehicles that will be loaded with Raytheon's rockets.
Lockheed Martin (NYSE:LMT) and Boeing (NYSE:BA), respectively America's No. 1 and No. 2 defense contractors, are also major players in the region. Lockheed Martin and Boeing both contributed to Saudi Arabia's famous "biggest ever arms deal" five years ago. Both companies had starring roles in Qatar's $11 billion weapons purchase last year as well. (So, too, did Raytheon.)
What it means to investors
Which brings us to our second point: In any military alliance, it helps if everyone is using the same weapons -- a concept known as "interoperability." Among other benefits, this makes it easier for the weapons to "talk" to one another, minimizing friendly fire incidents. With so many of Saudi Arabia's allies -- and the Saudis themselves -- using American weapons, it's only logical to expect future arms purchases for the alliance will also come from U.S. defense contractors.
Thus, companies that already have a strong presence in Middle Eastern arsenals -- Raytheon and General Dynamics, Boeing and Lockheed -- should therefore enjoy some measure of protection from competition from rival arms makers in Russia or China (for example) when bidding to sell to the new Islamic military alliance. With this moat in place, they'll be able to rely more on quality and brand loyalty to secure sales, and won't need to compete on price as much -- bolstering profit margins.
Result: Saudi Arabia's formation of an Islamic military alliance sounds like bad news for ISIS -- but it's probably very good news for U.S. defense contractors.
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