Howdy, folks.
Coalition forces expended 11,294 munitions in the first 16 days of the Iran war, at a cost of roughly $26 billion.
The Royal United Services Institute estimates that replacing them will run past $50 billion.
You’d think defense stocks would shoot higher considering the new orders needed to replace those munitions. Not so much: Defense stocks have gone down since June.
Why? On June 18 the U.S. and Iran signed an interim peace agreement. Lockheed Martin (LMT) led the S&P 500 lower that day, and Northrop Grumman (NOC) and RTX Corp. (RTX) went with it.
The reasoning was easy to follow: without a war, you don't need the weapons, so you shouldn't pay a premium for the companies that build them.
That reasoning ran about three months ahead of the invoices.
Replacing takes a lot longer than firing
At least $19 billion of that $26 billion went to missile interceptors. Half a million rounds of gun ammunition came to about $25 million of the total.
Interceptors are where the money goes, and interceptors are where the supply chain hurts. Solid rocket motors are the choke point, and you can't scale that kind of capacity on a normal procurement timeline.
Washington has spent this year admitting as much. In late July, the Defense Department announced two seven-year agreements to expand propulsion capacity for Patriot and THAAD interceptors. Seven years is an industrial policy commitment, and it'll outlive the war that prompted it.
The number I watch instead of the headlines
Book-to-bill is the ratio of new orders a company takes in against the revenue it actually books over the same stretch. Anything above 1.0 tells you the order book is filling faster than the company can work it off.
A contractor booking $1.20 of new business for every dollar of revenue has most of its next few years already spoken for. That holds whether or not the stock did anything last week.
Several of the big primes are running above 1.0 right now with backlogs at record levels. Their share prices haven't followed.
Now the honest part. Book-to-bill won't tell you what a stock is worth. It says nothing about what you're paying for it, whether management can execute, or whether a company is carrying trouble that has nothing to do with missiles.
Those are the questions I work through for Capitol Gains readers every week.
One name in this group just raised its full-year guidance, posted a record order book, and trades within a couple of dollars of its 52-week low. I wrote up the whole case this week, including the one thing about it that still bothers me.
Tap to join Capitol Gains and get the full write up.
- Frank