Analysis of the Investment Outlook for Defense Stocks: How to Choose Between U.S. Arms Manufacturers and Taiwanese Stocks?

In recent years, global geopolitical tensions have continued to escalate, from the Russia-Ukraine conflict to the Israel-Palestine war, with countries’ military expenditures constantly rising. Against this backdrop, the defense industry has gradually become a focus of investor attention. But which defense stocks are worth investing in? How can risks be avoided? This article will analyze the investment potential of American arms manufacturers and the development prospects of Taiwan’s defense stocks.

Why are defense stocks worth paying attention to?

The investment logic of defense stocks is relatively clear. As countries’ military spending increases year after year, technological warfare has become mainstream, with demand surging for new weapon systems such as drones, precision missiles, and information warfare. Rather than saying defense stocks benefit from war, it’s more accurate to say they benefit from the awakening of global security awareness.

From a macro perspective, the defense industry has three major investment characteristics: First, the track is extremely stable; conflicts and military needs never extinguish. Second, it has a deep moat, with high technical barriers, a stable customer base, and very high entry thresholds. Third, growth momentum is sustainable, as geopolitical conflicts drive countries to increase military investments.

However, when investing in defense stocks, one must beware of a trap: not all companies claiming to be “defense” are worth investing in. The key is to assess whether the company’s defense business proportion is sufficiently high.

How to evaluate the true value of defense stocks?

Before investing, three dimensions must be understood:

The importance of defense proportion

Even if a company’s military orders grow steadily, if its civilian business accounts for too high a proportion and faces difficulties, the overall stock price may still decline. For example, a certain American arms manufacturer may perform stably in its military segment, but a defect in its civilian aircraft business leading to a large recall ultimately drags down overall performance.

Judging future demand

In the era of technological warfare, military structures are adjusting. The update cycles for air force and navy equipment are accelerating, while army-related orders are limited in growth. Therefore, companies focusing on cutting-edge technology fields (such as missile systems, space communications, radar manufacturing) have greater growth potential compared to traditional military supply providers.

Risks in the civilian market

Engagement in the civilian sector may bring stable cash flow but can also become a burden. Attention should be paid to whether the civilian division faces cyclical fluctuations, increased competition, or policy changes.

Investment landscape of American arms manufacturers

Northrop Grumman: A model of pure defense stocks

Northrop Grumman Corporation (ticker NOC), as the world’s largest radar manufacturer and the fourth-largest defense manufacturer globally, has a very high proportion of its business in defense, representing a “pure defense stock.”

The company’s technology is in a leading position, focusing on strategic deterrence, covering space, missile, and communications technologies. Due to steady performance, it has increased dividends for 18 consecutive years. This year, it accelerated a $500 million share repurchase plan to maintain shareholder rights.

As long as most countries continue to increase their defense budgets (even without actual combat), demand for orders from such companies can remain stable and growing. From a long-term investment perspective, Northrop Grumman has a deep moat and is a worthy holding.

Lockheed Martin: A stable growth choice

Lockheed Martin (ticker LMT) is a top U.S. defense contractor, with its stock price steadily rising since listing. Occasional dips are mainly due to market adjustments rather than deterioration of fundamentals.

The company’s defense business accounts for a high proportion, with a stable customer base and abundant contract orders. From a long-term investment perspective, this is a stock worth continuous attention.

General Dynamics: Deep and stable moat

General Dynamics (ticker GD) is one of the top five U.S. defense suppliers, providing products across land, sea, and air forces. Although not a “pure defense stock,” its civilian division (including Gulfstream jets and services) serves high-end clients and is unaffected by economic fluctuations.

Financial data shows that even during the 2008 financial crisis and the 2020 COVID-19 pandemic, the company’s profits remained relatively stable. With steady income, it has increased dividends for 32 consecutive years, a rare achievement among U.S. stocks.

In terms of revenue structure, civilian accounts for 25%, navy 23%, national security information 22%, weapons 18%, and mission services 12%. Although growth is relatively moderate, the company optimizes profits through cost control and continues to buy back shares to protect shareholder interests. Therefore, while explosive growth is unlikely, its deep moat and stability make it a valuable investment.

Boeing: Bottom-fishing rather than chasing highs

Boeing (ticker BA) is a giant in both commercial and military aircraft. Its military products include well-known models like the B-52 bomber and Apache helicopter. However, the sharp decline in its stock price was not due to weak defense business but rather severe challenges in the civilian market.

Own quality issues: The 737 MAX accidents in 2018 and 2019 led to worldwide grounding, compounded by pandemic impacts, causing a significant decline in the company’s civilian segment.

Emerging competition threats: Historically, Boeing relied on U.S. and European subsidies to dominate the global market for decades. But with the escalation of U.S.-China trade, Chinese airlines are seeking alternatives, and the Chinese government is increasing support for domestic aircraft manufacturers. In the future, Chinese commercial aircraft are expected to gain a foothold in the global market, eating into Boeing’s traditional market share.

From an investment perspective, the stable growth of military business cannot offset the downturn in the civilian sector. Boeing is more suitable as a bottom-fishing target rather than a momentum chase.

Raytheon: Caution is advisable

Raytheon Technologies (ticker RTX) also faces difficulties in the civilian sector. The company supplies parts for Airbus A320neo aircraft, which have issues with powder metal materials that could cause engine damage under high pressure. This defect has severely impacted Airbus.

Currently, travel demand is strong, and airlines are rushing to buy new aircraft, but Raytheon’s defect may require an average of 350 Airbus A320neos annually to undergo re-inspection, with repair cycles up to 300 days. This not only impacts revenue but also exposes the company to litigation risks and customer loss.

Although military orders remain steady, the outcomes of handling civilian and legal issues are still uncertain, so further observation is needed.

Caterpillar: Blurred lines in defense stocks

Caterpillar Inc. (ticker CAT) is often classified as a defense stock, but actual military revenue accounts for less than 30%, with most income from industrial equipment. Post-war or disaster-related urban reconstruction needs may boost sales of related equipment, but the company’s outlook mainly depends on global government infrastructure spending and raw material demand.

Many other “defense stocks” with blurred boundaries exist. Some companies may have been contracted for battlefield logistics services and are labeled as defense concept stocks; even companies selling shoes or water bottles, if their main clients are the defense department, are also categorized as defense stocks. When evaluating, focus on customer composition, business diversity, and financial health.

Opportunities in Taiwan’s defense stock layout

Taiwan Strait, as a global geopolitical hotspot, has become a key focus for military budgets on both sides. China and Taiwan have both increased their national defense budgets over the past two years, driving related industry development.

Thunder Tiger Technology’s UAV opportunities

Thunder Tiger Technology (ticker 8033.TW), originally a remote-controlled model aircraft manufacturer, has transformed into a defense stock due to the rise of the UAV market. As demand for military applications increases, the company’s stock price surged significantly in 2022, with promising growth potential.

Hanxiang’s diversified advantages

Hanxiang (ticker 2634.TW) is involved in both defense and civilian sectors. Its civilian division handles maintenance and parts sales, while its military division mainly produces trainer aircraft. As the UAV market grows and the economy reopens, orders continue to increase.

Compared to overseas peers that may face difficulties due to single-brand or model issues, Hanxiang’s diversified business system (including maintenance and service markets) enhances its risk resistance. As long as the industry remains positive and demand increases, the company can earn more, making its stock performance relatively stable and worth attention.

Final reminder for investing in defense stocks

The market demand for defense stocks is undoubtedly stable and growing, but before choosing stocks, investors must deeply understand the company’s defense revenue proportion. At the same time, closely monitor whether there are hidden concerns in the civilian sector. Historically, there have been many cases where increased military demand led to stock price declines, mainly because civilian business drag or potential risks were overlooked.

The good news is that investing in defense stocks generally involves less risk of company bankruptcy. Major clients are governments, with close government-business relationships and high industry trust, which reduces systemic risk. Defense stocks typically have a deep moat and are candidates for long-term investment.

Ultimately, a wise investment decision can only be made by comprehensively considering the company’s financial health, industry trends, global geopolitical situation, and actual changes in the civilian market.