In a brief national address Wednesday, Russian President Vladimir Putin once again implied his willingness to resort to nuclear weapons in an effort to escalate the invasion of Ukraine. U.S. defense stocks jumped in early trade as Putin ordered his military reserve forces to mobilize, blamed the conflict on the West, and accused NATO countries of planning to use weapons of mass destruction against Russia.
"Russia will use all the instruments at its disposal to counter a threat against its territorial integrity — this is not a bluff," he said.
The speech, in which Putin made references to Russia's nuclear arsenal, came a day after Swedish arms watchdog group Stockholm International Peace Research said the market for nuclear weapons is expected to skyrocket. It also said the risk of nuclear conflict — with the U.S., Russia and China all postured for conflict — is at its highest since the Cold War.
The combination sent U.S. defense names sharply higher Wednesday. The push sent names including Lockheed Martin, General Dynamics and Raytheon Technologies up more than 2%, before paring gains after the Federal Reserve rate-hike news. Northrop Grumman also popped 2% in heavy trade, scoring a breakout to new highs.
Spending On Nuclear Weapons Rising
The global number of nuclear warheads has decreased steadily after peaking in 1986, when the total stockpile stood at 70,374. The current count is roughly 12,705. An estimated 3,732 of those are estimated to be deployed with operational forces. But that trend has already started to reverse, according to the SIPRI.
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A report released this week by Research & Markets estimated the worldwide nuclear bombs and missiles market at $72.64 billion in 2020. It forecast sales of such weapons will jump 79% to $126.34 billion by 2030. And as spending grows, there's a lucrative market for defense leaders like Northrop, Raytheon and Lockheed Martin.
Who Has All The Nuclear Weapons?
The U.S. continued to dominate the market for global nuclear bombs and missiles in 2020. But China's market share is expected to grow significantly over the next decade.
In 2021, global spending on nuclear weapons grew to $82.4 billion, according to the Nobel Prize-winning group International Campaign to Abolish Nuclear Weapons. The U.S. accounted for nearly half of that, spending $44.2 billion on nuclear weapons. China was next in line, at $11.7 billion.
While China was the second-largest spender, the U.S. and Russia maintained the largest stockpiles. In 2021, the U.S. and Russia had 5,550 and 6,255 nuclear warheads. They are expected to reach 6,380 and 6,734, respectively, by 2030.
By weapon-type category, Submarine-Launched Ballistic Missiles (SLBM) hold the highest market share in 2022. The segment is expected to lead for the forecast period. By range, the "greater than 5,000 km" segment is expected to lead the market. The active status segment is predicted to grow at a lucrative rate from 2021 to 2030, the ResearchAndMarkets report says.
Defense Stocks 'Well-Positioned'
Defense stocks including "NOC, LMT and RTX are very well-positioned to benefit from increased funding associated with nuclear missiles," said Ken Herbert, analyst at RBC Capital. RBC Capital disclosed it had a number of affiliates that provided services for Lockheed, Northrop Grumman and Raytheon when offering commentary.
In a recent equities research note, RBC Capital Markets said it expects funding for nuclear weapons to remain well-supported. It currently models the national defense budget's top line to grow 3% through 2027, with a 7% increase in missiles and munitions during that time.
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The U.S. plans to spend $50 billion annually on its nuclear forces through 2028, according to a 2019 Congressional Budget Office report.
RBC noted that Northrop Grumman is "best-positioned to benefit from continued nuclear recapitalization efforts." And L3Harris, General Dynamics and Lockheed Martin will benefit from greater international sales as NATO countries increase funding.
There were 15 new nuclear weapons contracts valued at more than $30 billion awarded in 2021, according to ICAN data. That compares with $14.8 billion in contracts awarded in 2020. Most of the multiyear contracts were related to the Trident or Minuteman III systems and are expected to continue through 2040. Northrop Grumman received three new contracts valued at $23 billion extending through 2040.
International Arms Sales
From 2017 to 2021, global arms transfers decreased 4.6% from the prior five-year period, SIPRI data shows. That is still up 3.9% compared with 2007-2011. The five largest importers of major arms over the last five years were India, Saudi Arabia, Egypt, Australia and China. Together, they accounted for 38% of total arms imports. While the five largest exporters for the period were the U.S., Russia, France, China and Germany. Those five countries comprised 77% of total arms exports.
The U.S. has ramped up its military aid to Ukraine and Taiwan, angering Russia and China. Independently, American-based defense companies also have other major international deals that draw ire from foreign nations.
Lockheed Martin has more than 50 global partnerships. Those include Taiwan, the U.K., the Republic of Korea, Japan, Saudi Arabia and United Arab Emirates. Northrop Grumman works with 25 different nations. Other major arms dealers including Raytheon and L3Harris earn major contracts overseas.
In February of 2022, China sanctioned Lockheed and Raytheon over its Taiwan deals, which for Lockheed have stretched back decades.
In addition to missile, defense and nuclear warhead sales, plenty of spending goes to lobbying. ICAN's 2021 report also noted that weapons producers spent millions lobbying on defense. Every $1 spent on lobbying generates an average of $256 in new nuclear weapons contracts.
Nuke Sales Oversight
The U.S. Department of State's Bureau of Political-Military Affairs oversees most government-to-government weapons sales and commercial export licensing for defense equipment and technology produced domestically. Under the department it manages roughly $55 billion in foreign military sales (FMS) of new defense equipment to allies. The bureau's Directorate of Defense Trade Controls provides regulatory approvals for $115 billion in commercial sales and services annually.
Global weapons regulations were first introduced in 2013 when the United Nations adopted the Arms Trade Treaty. The treaty established international standards governing arms transfers while promoting accountability and transparency. The U.N. prohibited transfers of weapons that could be used to commit genocide or war crimes. However, the treaty requires each state to enforce their transfers and compliance.
Defense Stocks In Focus
Defense stocks generally outperformed the market this year. LMT stock is up 21% year to date while NOC shares are up nearly 31%. RTX stock, on the other hand, has gained only 1.3% in 2022.
NOC stock broke out into a buy zone on Wednesday, past an alternate buy point of 497.30. Earlier, shares broke out from a double-bottom base on Aug. 5. Buy zones extend 5% above buy points.
NOC stock has a 94 RS Rating, indicating strong performance against the S&P 500 over the last 12 months. And it has an 85 Composite Rating out of a possible 99. The Composite Rating combines a number of technical and fundamental indicators into one score. NOC's EPS Rating, however, is only 73, as Northrop Grumman has reported year-over-year earnings declines for the last three quarters.
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