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US Ok's $2.2B Arms Sales to Taiwan: 3 Defense Stocks in Focus

Aparajita Dutta
America is set to supply 108 M1A2T Abrams tanks, 250 Stinger missiles and four Stinger Fly-to-Buy missiles to Taiwan. The U.S. Aerospace-Defense industry's major indices gain following the news.

Investors putting money into U.S. defense stocks cheered the news of the U.S. State Department’s approval of a potential arms sale worth $2.2 billion to Taiwan on Jul 8. As expected, the U.S. Aerospace-Defense industry’s major indices like the S&P 500 Aerospace & Defense (Industry) and the Dow Jones U.S. Aerospace & Defense index inched up 0.4% on Jul 9 following this announcement.

While the deal bears good news for U.S. defense contractors, it faced criticism from China, which considers Taiwan as a deranged province.

The approval comes at a sensitive time with Washington and Beijing resuming trade talks. It may hamper possible trade negotiations.

Details of the Deal

According to the Defense Security Cooperation Agency (DSCA), the deal includes 108 M1A2T Abrams tanks, about 250 Stinger missiles, four Stinger Fly-to-Buy missiles, along with related equipment and support. DSCA said the possible arms sale might also include mounted machine guns, ammunition, Hercules armored vehicles for recovering inoperative tanks, heavy equipment transporters and related support.

Per DSCA, the proposed tank sale should contribute to the modernization of Taiwan’s main battle tank fleet, boosting its ability to counter current and future regional threats, thereby strengthening its homeland defense. These tanks are expected to aid Taiwan’s goal of upgrading its military capability.

The missile sales are believed to support U.S. foreign policy and national security strategy by improving the security and defensive capability of Taiwan.

U.S.-Taiwan Relations

America and Taiwan enjoy a robust unofficial military relationship, with the United States being the primary arms supplier to the latter. The two nations share a long-time combat relationship, with the first weapon transfer of 48 F-5E jets dating back to as early as 1979.

In particular, this relationship has strengthened over the last decade, with Taiwan significantly boosting its defense investment in the face of increasing pressure from China. Of the numerous military deals struck between America and Taiwan in the last decade, the $6.5 billion-arms deal involving 30 Boeing BA Apache attack helicopters, 330 Patriot missiles and 32 Harpoon submarine-launched missiles in 2008 is worth mentioning.

Stocks to Gain

Here we discuss three companies, which are expected to benefit from the approval of the $2.2 billion arms sales deal. These stocks also have a solid long-term growth rate that makes us confident of their future earnings.

General Dynamics’ GD Abrams M1A2 is the advanced version of the M1A1 battle tank and is equipped with an improved fire control system. It continues to be the top tank choice for the U.S. Army, National Guard and Marine Corps as well as several U.S. allies. The company boasts a solid long-term earnings growth rate of 8.9%.

Raytheon’s RTN Stinger missile maintains a greater than 90% success rate in reliability and training tests against advanced threat targets. This weapon can be rapidly deployed by ground troops as well as Apache helicopters for air-to-air engagements. The company boasts a solid long-term earnings growth rate of 11.3%.

BAE Systems Plc BAESY Hercules vehicle offers lowest acquisition, operational and maintenance cost of any 70-ton capable recovery system.  It was the primary 70-ton recovery system during Operation Iraqi Freedom The company boasts a solid long-term earnings growth rate of 4%.

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