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Trump Urges NATO Allies to Pay More: 4 Defense Stocks to Buy

Zacks Equity Research

In keeping with his image of making impactful and at times controversial statements, U.S. President Donald Trump recently urged a few North Atlantic Treaty Organization or NATO member nations to loosen their purse strings and cough up a ‘fair’ amount.

In a joint press conference with German Chancellor Angela Merkel, on Mar 17, Trump expressed his disapproval of how a few nations including Germany owe ‘vast sums’ to the U.S. as well as NATO. He described the situation as a ‘very unfair’ one, especially for his country.

Notably, in another of his debatable tweets, Trump particularly targeted Germany for having the benefit of an expensive defense base at the cost of the U.S.

What’s Germany’s Reaction?

In response, Merkel applauded the President’s acknowledgement of the importance of NATO. She further pledged that her nation will raise its own contributions and meet the target of spending 2% of GDP on defense for the NATO alliance by 2024.

Later, German defense minister Ursula von der Leyen vehemently protested against Trump’s claims, stating that’s not how NATO works. She also added that NATO does not hold any debt account.

According to Leyen, the nation’s defense spending goes into UN peacekeeping missions, European missions as well as into the fight against IS terrorism, making it difficult to shell out more for the alliance.

How Did the Others React?

Trump’s claims were strongly opposed by experts in the U.S. as well. In particular, Ivo Daalder – former U.S. Ambassador to NATO – responded to Trump’s tweets by saying that the U.S. can only decide for itself in terms of contribution to NATO.

He also appreciated the fact that the NATO allies who currently spend less than 2% of GDP on defense are increasing their budgets.

What’s the Real Story?

NATO is an intergovernmental military alliance based on the North Atlantic Treaty, which was first signed in 1949. Currently it constitutes 28 member countries who offer defensive protection to each other in events of any hostile attack from external nations. In its 2014 Wales summit, NATO members reaffirmed their commitment to spend 2% of their GDP for defense and achieve that target by 2024.

Herein we note that Germany is among NATO members’ countries that have come up short of the 2% target and spend 1.16% of GDP in 2016. In comparison; the U.S.’s spending was 3.2% of GDP. Probably from this point of view, Trump’s describing U.S.’s situation to be an unfair one can be taken into consideration.

However, Trump’s claims of Germany owing money to the U.S. as well as the NATO are clearly baseless and mischaracterize the commitments that NATO members currently follow. They are under no strict obligation to spend 2% of GDP anytime before 2024 and to anyone apart from NATO.

Which Stocks Are Likely to Gain?

Although Trump’s comments were widely criticized, the U.S. is the largest contributor to NATOwith the volume of defense expenditure representing 72% of the total defense spending of the alliance. Considering this, Trump’s pressure on NATO members to spend more on defense is expected to increase defense funds for the allied members as a whole. Clearly, defense biggies in the U.S. that generate a substantial share of their revenues from international customers will be the direct benefactors of the situation.

Lockheed Martin Corp. LMT: Being the largest defense contractor in the world, Lockheed Martin is a global aerospace and security company that manufactures military aircraft and helicopters and related advanced technologies, missile system, government satellites and similar products. In 2016, 27% of the company’s total sales were derived from its international customers.

Lately, the company has been witnessing strong demand for its equipment, ranging from C-130J aircraft in France and Germany to helicopters in Poland to missile defense systems in the Asia Pacific, Europe, and Middle East.

Over the past five years, the company’s EPS witnessed growth 9.1%, outperforming the Aerospace Defense industry’s gain of 5.5%.

The Boeing Company BA: Being the largest global aircraft manufacturer, Boeing manufactures military as well commercial aircraft, rotorcraft, rockets and satellites. In 2016, 31% of the company’s total sales were derived from international customers. At the end of 2016, its defense business had a healthy backlog of $57 billion, 37% of which was derived from international customers.

Moreover, the company completed digital flight deck upgrades on the first of 14 NATO Airborne Warning and Control System (AWACS) aircraft in 2016.

Over the past five years, the company’s EPS witnessed growth 10.6%, outperforming the Aerospace Defense industry’s growth of 5.5%.

Raytheon Company RTN: Being one of the best-positioned large-cap defense players in the U.S., Raytheon offers a diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems, and technical services. In 2016, 31% of the company’s total sales were derived from its international customers.

In Europe, while economic and political challenges have constrained defense spending of certain European nations, others have begun to increase spending in response to geopolitical events and conflicts in Eastern Europe and the resulting uncertainty and security threat environment. Based on this, Raytheon expects European nations to continue to seek advanced air and missile defense and other capabilities, which in turn will boost revenues.

The company currently has a P/E ratio of 20.81, compared to the corresponding industry’s P/E ratio of 64.10; thereby making this high-profile stock a low-priced investment oprtion.

Textron, Inc. TXT: Textron Inc. is a global multi-industry company that manufactures aircraft, automotive engine components and industrial tools. In 2016, 38% of the company’s total sales were derived from its international customers and 14% from Europe alone.

Over the past five years, the company’s EPS witnessed growth 13.3%, better than the Aerospace Defense industry’s growth of 5.5%.

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