Ofcourse,onemajorconcernisthatiftheUSwindsdownactivitiesintheMiddleEast,largerdefenceprogrammeswillbedelayed。

ButeveniftheUSstepsdownplanstointroducenewarmouryintoitsranks,itwillstillhavetoupgradetheequipmentitalreadyhas。

Forexample,eachofits7,000Bradleyfightingvehiclescosts£1mtofixandafurther£3mtoequipwithmoderncommunicationssystems。

Some$48bnisallocatedinthepresentUSbudgettowardsmaintenanceworkalone。

Defencestockssettobenefitfrommodernisation

IndiaandJapanarealsomodernisingtheirmilitary。

USandEuropeanjetcontractorsareengagedina“dogfight”tosecureordersfromIndiaandJapanworthupto$15bnintotal,sayDavidRobertsonandLeoLewisinTheTimes。

TheJapanesehaveusuallyboughtUSmilitaryhardwareinthepast,butwereirkedthatUSCongressdeemedthecountrywasnot“trusted”tobuyUS-manufacturedF22fighters。

That’sgoodnewsforEuropeanjetmakers,ledbyBAE(seeboxbelow),whichhopetoreplaceJapan’sfleetofF4swiththeEurofighterTyphoon,at$60mapiece。

IntheUK,meanwhile,thesectorisbenefitingfrommeasurestakenbytheMinistryofDefence(MoD)todelivernewcontractsmoreefficiently。

Underthenewstrategy,theMoDhelpscoordinatetheuseofequipment,specialistlabourandsupportservicesintheindustry,reducingcostsandwastefulproduction,andcuttingtheriskofcostover-runs。

A£20bncontractforUK-builtTyphoonsisexpectedtobesignedwithSaudiArabialaterthisyearandahostofsmallerprojectsareinthepipeline。

Consolidationinthesectorisalsolikelytocontinue,withUSgroupsBoeingandNorthropGrummanamongthosewhohaveexpressedaninterestinbuyingpeersintheUK。

“Takentogether,then,thepictureisofanindustryinsulatedfromtheeconomiccycle,”saysMcCrum。

Eveninthecaseofaneconomicdownturn,thetimescalesonlargeindividualprogrammes,typicallytento15years,meanthatanychangestospendingwilltakeawhiletohaveanimpact;andgovernmentswillbereluctanttoscalebackmodernisationprogrammesoncetheyhaveembarkedonthem。

Wehavealookatthecompaniessettobenefitbelow。

Defencestocks:twosafeplays

“Asapuredefenceplay,BAE(LSE:BA)iswell-placedacrossthekeyareasoffuturespendingonland,seaandairprogrammes,”saysDanMcCruminInvestorsChronicle。

ContractswonfromtheUSDepartmentofDefencetorefurbishUSBradleyFightingVehicles,forexample,boostedoperatingprofitsby38。

5%to£1bnlastyear。

WithaheavyadvanceexpectedwhentheSaudiTyphooncontractissignedandfurtherinterestfromJapanandIndiaintheaircraft,thecompanyjustifiesits“overweight”ratingfromJPMorgan。

Thecompany’ssharesalsotradeatadiscounttotheEuropeandefencesector,onaforwardprice/earnings(p/e)multipleof14。

9,andaprospectivedividendyieldof3%。

AnothergoodbetisGeneralDynamics(NYSE:GD),largestsupplierofequipmenttotheUSarmy。

GeneralDynamicsistheonlybuilderoftanks,infantrycombatvehiclesandnuclearsubmarinesintheUS,whichitalsomaintains。

Italreadyhasalargeportfolioofprojectsfullyfunded,withacontractedbacklogtwiceasbigasannualsales。

Recenttroubles,includingcostover-runsandproblemswithanewamphibiouscraft,haveseensharestradeatalowerp/ethantheotherthreebigUSdefencecontractors,atabout18。

3timesearningscomparedwiththeindustryaverageof20times。

Butlong-terminvestorsshouldlookbeyondthis“toseeasolidcompanyinanindispensableindustry”,saysBarrons

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