Defense contractors have increasingly sought foreign sales as a way to diversify beyond their primary customer -- the Pentagon -- and to grow revenue. Companies like Lockheed Martin (NYSE: LMT), General Dynamics (NYSE: GD), Northrop Grumman (NYSE: NOC), and Raytheon (NYSE: RTN) are about to get a huge boost from the U.S. government in support of their efforts.
The Trump administration is set to announce a new "Buy American" campaign that would push U.S. military attaches and diplomats to help sell American weaponry overseas, according to a Reuters report. The new plan, which would go well beyond current policies, is expected to be announced in February.
A Terminal High Altitude Area Defense (THAAD) missile launch at sunset. Image source: Lockheed Martin.
A senior administration official told Reuters that the White House wants to see commercial and military attaches "unfettered to be salesmen for this stuff, to be promoters" of U.S. arms. Specifically, the policy is likely to apply to embassy security assistance officers, who currently manage overseas military aid and coordinate with foreign governments on weapons purchases.
The administration also intends to ease export rules, according to the report, a move that might boost sales but likely would face criticism from human-rights groups.
Strength in diversification
The policy change comes as U.S. defense contractors, stung by Washington budget battles that led to a freeze in Pentagon spending and delays to key programs, have talked up foreign sales as a path to boosting revenue growth.
Though the U.S. is, by far, the world's largest military spender -- accounting for $611 billion of the $1.686 trillion in global spending in 2016, according to the Stockholm International Peace Research Institute -- conflict in the Middle East, saber-rattling by North Korea, and a rejuvenated Russia have allied governments all over the globe focused on defense spending.
U.S. companies made nearly $42 billion worth of foreign weapon sales during the government fiscal year ending Nov. 30, 2017, an increase of 25% over the $33.6 billion figure reported a year prior.
But the new policy also follows Trump's criticism of NATO allies for not spending enough on their own defense, which in turn has led to some European politicians to demand that their governments focus on buying from local, and not U.S., sources when possible. A separate conflict between Boeing and Canada has the potential to spill into the U.K., potentially offsetting any benefit selling by the diplomatic corps could offer.
More potential customers
Any loosening of restrictions on weapons sales would provide further evidence that the Trump Administration is broadening the potential number of customers for U.S. weapons. Critics of liberalized foreign sales have argued that human-rights concerns, coupled with fears of selling to unstable governments where weapons might eventually get into the hands of U.S. enemies, make strong restrictions vital.
But the current administration, in its first year, has already pushed a number of controversial sales, including precision-guided munitions to Saudi Arabia that could be used in the civil war in neighboring Yemen. A $3 billion deal with Bahrain, which was held up by the Obama Administration due to human-rights concerns, is also now moving forward.
Is "Buy American" time to buy?
Defense primes are up around 20% to 35% since the beginning of 2017, but as evidence grows that a domestic spending spree will be delayed, it will likely take a surge in foreign sales to keep the stocks climbing. The policy change, assuming it comes, is certainly a step in the right direction.
Alas, foreign arms sales take considerable time to finalize, no matter who is in charge in Washington, and the payoff for defense companies tends to come over a number of years and not overnight. It's hard not to be upbeat about the U.S. defense sector, given the demand for its products both at home and abroad. But a policy shift in Washington is not enough to justify buying in at these levels.
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