The proximity to the Ukrainian war, the increasingly aggressive Russian rhetoric against NATO and the prospects of a new Trump presidential term are making European countries increase their defense capabilities.
With the post-Cold War peace dividends essentially over, contracts are starting to flow again for the companies manufacturing munitions, F-35 fighter jets or air defense systems like Patriot. But investments are needed to boost production capacity and supply chains are still tight,according to eToro analyst for Romania, Bogdan Maioreanu..
NATO’s Support and Procurement Agency will support a coalition of Allies, including Germany, the Netherlands, Romania and Spain to procure up to 1,000 Patriot missiles to strengthen their air defenses amid Russia’s war against Ukraine. Out of the lot, Romania will contract 200 Patriot missiles. The entire $5.5 billion contract has been awarded to COMLOG, a joint venture between the US company Raytheon and European company MBDA. The large volume of the order will support the set up of a production facility for Patriot missiles in Germany.
While the current geopolitical tensions are putting into focus the defense spending on the rise, investors are looking at the overall performance of companies. RTX Corporation (formerly called Raytheon Technologies) reported sales of $19.9 billion, up 10% versus prior year, in Q4 2023. A recovery in commercial air traffic and increased global defense spending helped the company report better-than-expected results on both sales and earnings. RTX reported EPS of $1.29 per share in the fourth quarter, ahead of analysts’ estimate of $1.25 per share. RTX makes among others the Patriot system, also ordered by Romania, as well as a wide array of rockets, jet engines and advanced electronics and avionics including space technologies for both military and civil use.
Lockheed Martin reported fourth quarter 2023 net sales of $18.9 billion, compared to $19.0 billion in the fourth quarter of 2022. Revenue slipped less than 1% from a year earlier to $18.87 billion but was beating the consensus estimate of $17.95 billion. Net earnings in the fourth quarter of 2023 were $1.9 billion, or $7.58 per share, respectively. Declines in the company’s missiles and fire control unit and its rotary and mission systems segment outweighed a gain in its space exploration group. Deliveries of the F-35 fighter fell 31% from a year earlier to 98 jets in 2023 amid testing of the software for the Technology Refresh-3 version and supply-chain constraints. The company estimates that the aircraft delivery range for 2024 is between 75 and 110, fewer than the usual 150 units annually the company aims to deliver.
Romania is planning the acquisition of 48 Lockheed Martin F-35 Lightning II Joint Strike Fighter (JSF) in two phases of 32 and 16. Our country was also mentioned in the Lockheed Martin earnings call, with the first European F-16 training center in Romania inaugurated in November in a partnership between the company, Romania and the Netherlands. This center will provide world-class training to enhance mission readiness and ensure safety of flying and operating F-16 fighter jets.
Despite the increase in defense spending there are some unknowns in how the supply chain challenges will affect the aerospace and defense (A&D) production in 2024. The increased demand is bringing increased necessity to source parts from a myriad of low tier suppliers leading to an exceptionally complex supply chain. Also, despite this improvement in 2023, the continuing shortage of raw materials, semiconductors, microelectronics, and other key components or parts will likely remain a key issue for A&D companies in 2024 as production demand increases across the board, according to the consulting company Deloitte. Availability of skilled workforce might be a risk factor too.
Lockheed shares dropped almost 6% after the earnings report. RTX Corporation, on the other hand, grew over 8% in the same period. Despite good business perspectives both in commercial and defense segments, the industrial segment where RTX and Lockheed Martin are listed is not very popular with the Romanian investors. Only 18% declared that they are holding stocks in this sector that is before last in the investors preferences, according to the last eToro Retail Investor Beat survey.
