Arms companies may be multiplying orders and profits, but it seems like an uncertain investment

26.01.2023 15:11|Conotoxia Ltd Analyst Team

Since the start of Russia's aggression against Ukraine, much has changed in global markets, including inflation, interest rates, a rally in commodity prices or the rates of so-called defensive currencies. The conflict may now have entered a phase of war of attrition with no end in sight. Factories producing arms equipment are thus gaining additional orders.

Leopard manufacturer Rheinmetall AG

Rheinmetall AG (Rheinmetall) is a German industrial conglomerate and one of the leading providers of military and industrial equipment. The company specialises in the production and sale of artillery systems, anti-aircraft systems, anti-missile systems, submarines, combat vehicles (including Leopard tanks), special vehicles, propulsion systems and armaments. Rheinmetall also offers maintenance services, upgrades and product development for its customers. At the same time, the company offers solutions for the automotive, energy and railway industries. Rheinmetall AG's shares have risen by 120% since the start of the conflict, according to the BBC News website in its latest announcement: "After weeks of intense pressure, Germany confirmed it would send 14 of its state-of-the-art Leopard 2 battle tanks to Ukraine. Shortly afterwards, US President Joe Biden confirmed reports that the US would send Ukraine 31 of its own Abrams tanks".

Source: Conotoxia MT5, Rheinmetall, Daily

Manufacturer of armoured vehicles and upgraded Leopards 2 BAE Systems, among others.

BAE Systems (BAESystems) is an international industrial company specialising in the manufacture of military equipment, electronics and security systems, and services for governments, armed forces and private companies. The company offers a wide range of products and services to various defence industries, including aviation, navy, special forces and civilian companies, governments and international organisations. The company is also active in research and development, particularly in new technologies such as robotics, intelligent systems, artificial intelligence and cyber security.

BAE Systems is also a manufacturer of combat aircraft such as: Eurofighter Typhoon, Hawk. In the field of combat vehicles, BAE Systems offers: tanks (Challenger 2, or Leopard 2A4), armoured vehicles (CV90), water buoys, artillery systems, radars, anti-aircraft and anti-missile systems. BAE Systems also specialises in communication and cyber security systems, data analysis systems, fire control systems, navigation, early warning and air and missile defence. The company's shares have risen by 73% since the start of the war and it appears that, as with Rheinmetall AG, this may have been related to the war in Ukraine.

Source: Conotoxia MT5, BAESystems: Daily

French aerospace company Safran

Safran (Safran) is a French industrial concern specialising in aerospace and defence equipment. In terms of military products, Safran offers a wide range of solutions, including:

  • aero engines for combat aircraft such as the Rafale, Eurofighter and F-35
  • rocket and spacecraft propulsion systems
  • electronics and security systems, including radar, thermal imaging cameras, communication and navigation systems
  • energy management systems, including emergency power, solar power systems
  • electronics and security systems, including target identification systems, anti-hazard systems
  • systems and equipment for the defence industry, including armoured vehicles, small arms, anti-aircraft and anti-missile systems

Safran also offers maintenance services, upgrades and product development for its customers and carries out research and development of new technologies in the aerospace and defence industries. Since the beginning of the conflict in Ukraine, the company's shares have risen by more than 20%.

Source: Conotoxia MT5, Safran, Daily

Abrams tank manufacturer closes stake

General Dynamics (GD) is an American industrial conglomerate that designs, manufactures and sells military equipment, information systems and services to governments, armed forces and private companies. In terms of military activities, General Dynamics offers:

  • combat vehicles such as Stryker, Abrams and LAVs
  • artillery and missile systems
  • warships, such as the Zumwalt and San Antonio
  • combat and security electronics systems, including communications, navigation, radar, thermal imaging cameras
  • information systems for government, armed forces and businesses, including data management systems, cyber security systems, data analysis systems
  • maintenance services, modernisation and product development for its customers, and conducts research and development of new technologies in the fields of aerospace, defence and IT.

The company now appears to be struggling to deliver orders, despite announcing $3.4 billion in net income for the full year 2022 in its latest report, up 4.1% from 2021. Earnings per share (EPS) were $12.19 in 2022, an increase of 5.5% compared to 2021. Revenue for the full year increased by 2.4% to $39.4 billion compared to 2021, with an operating margin of 10.7% (previously 10.82%). The company ended the year with an order intake of $91.1 billion, an estimated contract value of $127.7 billion and $1.2 billion in cash. Its shares have risen 3.8% since the start of the war.

Sources: Conotoxia MT5, GD, Daily

What does the future hold for military action?

Russia seems to finance war expenses from gas and oil sales, while Ukraine in turn could maintain its defence through arms supplies from the West. However, Ukraine is more dependent on other countries because Russia has larger gold reserves amounting to around 15% of GDP and a still functioning economy. A protracted conflict may translate into further orders of armed equipment and higher profits for its manufacturers. Investing in such companies, however, could be risky. This is because it is difficult to predict when and how the conflict will end, which may be priced into the share value of arms companies.

 

Grzegorz Dróżdż, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

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