U.S. Defense Contractors With International Sales Should Benefit From Battle Against ISIS
U.S. defense-related stocks staged a strong rally Monday, even though President Obama said he had no plans to change the military strategy against ISIS in the wake of Friday's terrorist attacks in Paris.
Among the big winners in the defense rally were Raytheon (RTN) - Get Report and Northrop Grumman (NOC) - Get Report . Each gained more than 4%. The reason is that both of these companies have significant international sales, which means the companies can benefit even when there is no change in U.S. policy or military spending.
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Shares of a smaller defense contractor, Orbital ATK (OA) , gained more than 6% Monday. A sizable chunk of its revenue, about 22%, comes from international sales, and the stock likely got an additional boost from the company's announcement last week that it has established a joint venture in Saudi Arabia that's designed to help that country bolster its security and self-defense.
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Since the Paris attacks, both President Obama and Democratic presidential candidate Hillary Clinton have said the U.S. should have its Middle Eastern allies do a majority of fighting against ISIS. The Saudis in the past have been particularly active in assisting by using their air force to attack ISIS. With Orbital's joint venture in Saudi Arabia, it is expanding an already active presence in the Middle East.
As for Raytheon, approximately 80 countries use its products, with the strongest demand coming from the Middle East. Northrop Grumman also has strong ties to the area, including a partnership with Saudi Arabia that is more than 30 years old.
Orbital ATK recently reported strong earnings and sales for its third quarter. It attributed the strength to recently established international partnerships. Analysts continue to revise their estimates higher as the company continues to grow overseas.
This article is commentary by Mary Ellen McGonagle, President MEM Investment Research an independent contributor. At the time of publication, the author held a position OA.