Defense Contractors’ Shares Surge Amid Middle East Conflict

The recent escalation of the conflict in the Middle East has led to a surge in shares of defense contractors. As tensions rise between Israel and Hamas, investors are closely monitoring the situation to identify potential winners and losers in the defense sector.

Lockheed Martin, the parent company of helicopter maker Sikorsky, has seen its shares rise by 4.9% in premarket trading. Similarly, Northrop Grumman shares have increased by 4.3%. General Dynamics, L3Harris Technologies, and Huntington Ingalls Industries have also experienced gains of 3.2%, 3.2%, and 1.6% respectively. RTX shares are up by 4%.

However, Boeing shares have remained flat amidst the conflict. Smaller defense stocks such as Kratos Defense and Security Solutions and BWX Technologies have seen mixed results, with gains of 3% and 0.7% respectively. On the other hand, Mercury Systems shares have declined by 1.8%.

While defense contractors’ shares are surging, the broader market is experiencing a decline, with S&P 500 and Dow Jones Industrial Average futures down by 0.5% and 0.4% respectively. The collective market capitalization of defense stocks has increased by $15 billion, reaching approximately $500 billion.

Investors are seeking guidance on the duration and potential escalation of the conflict, as a shorter and contained conflict could lead to a reversal of gains in defense shares. Additionally, investors are considering the impact of a potential U.S. government shutdown on the defense sector, although historically, shutdowns have had minimal effect on defense stocks.

In recent times, defense stocks, excluding Boeing, have not performed strongly. Only Boeing shares have shown growth over the past 12 months, primarily due to its commercial aerospace business. The average performance of other large-cap defense stocks has declined by approximately 14% during the same period, while the S&P 500 has risen by about 19%.

Consequently, defense stocks, excluding Boeing, are currently trading at around 14.5 times estimated 2024 earnings, down from the historical average of 17 times in recent years. Boeing’s earnings are still recovering from the impact of the Covid-19 pandemic and the 737 MAX issues, resulting in the stock trading at approximately 38 times estimated 2024 earnings.

As the Middle East conflict unfolds, investors will continue to monitor the situation and assess its potential impact on the defense sector. The outcome of the conflict and its duration will likely influence the performance of defense stocks in the coming weeks.