Defense companies do not get support from Russia’s war with Ukraine 2022-04-28 13:59:24

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But so far, this has not been the case after the Russian invasion of Ukraine.

Global military spending grew 0.7% and surpassed $2 trillion for the first time in 2021, according to a new report from Stockholm International Peace Research Institute Found. This number is expected to grow significantly this year. The 2022 United States fiscal public spending bill included a 4.7% increase in defense spending, to $728.5 billion.

The sector is also likely to benefit from President Joe Biden’s $3.4 billion commitment to help Ukraine in the war against Russia.

Analysts wrote in American bank (buck).

However, corporate earnings in the first quarter show that fighter jets and arms makers have already been hit by the Russian invasion of Ukraine. That’s because they lost one of their biggest clients: the Kremlin.

Although defense stocks rose in February as Russia began its attacks, they have since settled on a decline. iShares US Aerospace & Defense ETF (ITA)which tracks companies including Raytheon (RTN)And Lockheed Martin (LMT)And Boeing (Bachelor of)And general dynamics (JD) And Northrop Grumman (No objection certificate), by 10% between late February and early March. This month, it’s down about 6.5%.

Investors don’t always realize how slowly money flows from Congress to the US Treasury to contractors. It’s a process that takes time.

“These investors are expecting a quick boost in [first-quarter] Profits for defense contractors due to the war in Ukraine are likely to be very surprised.”

Raytheon Technologies cut its revenue forecast for the year Tuesday, blaming slumping sales on Russian sanctions. Shares of the aerospace and defense company fell about 4.4% during the month.

Raytheon CEO Greg Hayes told investors that revenue guidance has fallen by $750 million because global sanctions against Russia have limited sales. Before the sanctions were implemented, Russia accounted for about 1.5% of Raytheon’s sales, or roughly $900 million annually. The company said the sanctions had taken a “relatively large blow” to earnings.

Hayes said the company may still see a rise in sales due to orders related to Ukraine, but not this year. The CEO said that production of Raytheon Stinger and Javelin missiles, the main weapons of the Ukrainian resistance to Russia, has been halted due to supply chain and technology problems. The company won’t be able to replenish missile supplies until 2023 or 2024.

Even when production is up, “we don’t make a huge margin on these products. It’s all based on cost pricing,” Hayes said. Harvard Business Review Last month.

The company is also experiencing mineral shortages due to the conflict. Hayes said they are seeking titanium sponge and castings and forgings for aircraft parts after ending ties with their Russian suppliers.

Bert Sobin, vice president of equity research at Stifel Financial, said supply chain problems have hurt most defense companies. Steel, aluminum and nickel are hard to come by, and the Covid-19 shutdown in China is likely to exacerbate the problem by delaying shipments from Shanghai, the world’s largest seaport.

Losses across the defense sector

Boeing also failed to estimate its profits and cited similar delays in defense programs. The company’s T-7A Red Hawk program recorded its first cost overrun of $367 million. Boeing wrote in its earnings report that the problems were “primarily driven by ongoing supplier negotiations affected by supply chain restrictions, the COVID-19 virus and inflationary pressures.”

Lockheed Martin reported a mixed first quarter. Stocks fell sharply after the F-35 maker reported an 8% annual drop in sales due to supply shortages linked to the pandemic. The company said that although it is in talks with the Pentagon to increase production of weapons for Ukraine, it has not yet increased production. Chief Financial Officer Guy Malav confirmed on the earnings call that production for Ukraine would not have any immediate impact on its financial results.

Most major military conflicts over the past two decades have led to an initial jump in the defense stock — including the Russian invasion of Crimea in 2014 and the 9/11 attacks in 2001 — but those gains have all but been erased as initial fears of broader impacts fade . Although defense may be a good bet for investors in the long-run, Bank of America said, it probably won’t be a profitable segment for those looking for quick wins.

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