Pentagon’s End-of-Year Spending Surge: Major Contracts for Defense Giants

As the fiscal year 2024 concluded, the Pentagon embarked on a massive spending spree, a routine practice to ensure that its allocated budget is fully utilized before the year ends. This rush to finalize contracts is driven by the desire to avoid potential budget cuts and carry over unspent funds. Three major defense contractors—Boeing, Lockheed Martin, and RTX—emerged as the biggest beneficiaries of this year’s end-of-fiscal-year contracts, securing billions of dollars in lucrative deals.

Boeing’s Record Small Diameter Bomb Contract

On the final day of the fiscal year, Boeing secured an enormous $6.9 billion contract with the U.S. Air Force to supply Small Diameter Bombs (SDBs), a 250-pound guided air-to-surface munition. The SDB is known for its precision and adaptability, capable of being deployed by a wide range of aircraft, including the F-15E, F-22, F-35, and F-16 fighter jets. Notably, the contract lists international allies, including Bulgaria, Japan, and Ukraine, as recipients of these advanced munitions, underscoring the U.S. military’s commitment to supporting its allies with cutting-edge technology.

The SDB contract represents a significant win for Boeing, especially in light of ongoing global conflicts and rising tensions in Eastern Europe and the Indo-Pacific. However, despite the size of this deal, Boeing’s Defense and Space business unit (BDS) has struggled with profitability in recent years, casting doubt on how much the $6.9 billion contract will improve the company’s financial outlook. Boeing’s defense division has posted losses for two consecutive years, and although the SDB contract boosts revenue, it may not significantly impact the company’s bottom line.

Lockheed Martin’s Missile Deals

Lockheed Martin also saw a windfall from the Pentagon’s year-end spending, with two major missile contracts secured just a day before the fiscal year closed. The largest of these, a $3.2 billion deal, involves the production of Joint Air-to-Surface Standoff Missiles (JASSM) and Long-Range Anti-Ship Missiles (LRASM) for the U.S. Air Force and several allied nations, including Finland, Japan, the Netherlands, and Poland. These long-range missiles are critical components of modern warfare, designed to engage targets from considerable distances while minimizing risks to personnel and aircraft.

In addition to the JASSM and LRASM contract, Lockheed received a separate $358.4 million order specifically for LRASM missiles. This brings the total value of Lockheed’s missile contracts to nearly $3.6 billion, further solidifying the company’s dominance in the defense sector. Unlike Boeing, Lockheed Martin’s defense business has been consistently profitable, and the missile contracts are expected to enhance its operating profits by around 5%, making it a solid choice for investors seeking stable growth in the defense industry.

RTX’s Multi-Billion-Dollar Contracts

RTX, formerly known as Raytheon Technologies, secured three significant contracts totaling $1.5 billion on the same day as Lockheed Martin’s missile deals. The largest of these contracts, valued at $736.6 million, involves the production of over 1,100 AIM-9X Sidewinder air-to-air missiles for the U.S. military and foreign allies. The AIM-9X is a heat-seeking missile that plays a pivotal role in air combat, providing fighter jets with a powerful tool to engage enemy aircraft.

RTX also received a $525.5 million contract to supply Evolved Seasparrow Missiles, an advanced air defense system designed to protect naval vessels from incoming threats. Additionally, the company secured a $254.5 million contract for maintenance services related to Standard Missiles, which are widely used in both air and sea defense applications.

RTX’s defense operations are also consistently profitable, and these new contracts are expected to boost the company’s operating profits by approximately 2%. The diverse range of contracts, covering both offensive and defensive missile systems, positions RTX as a key player in the global defense industry, with solid prospects for growth in the coming years.

Investment Implications

From an investor’s perspective, the Pentagon’s $12 billion in year-end contracts presents opportunities and challenges. Boeing’s massive $6.9 billion SDB contract is undoubtedly a revenue booster, but the company’s ongoing struggles in its Defense and Space division mean it may not contribute significantly to profitability. Investors should be cautious about viewing Boeing’s defense contracts as a solution to its broader financial issues.

On the other hand, Lockheed Martin and RTX operate consistently profitable defense divisions, making their missile contracts more likely to drive meaningful profit growth. Lockheed’s missile deals could increase its operating profits by 5%, while RTX’s contracts are expected to add about 2% to its profits. For investors seeking stable returns in the defense sector, Lockheed Martin and RTX appear to be more favorable choices than Boeing.

Alternative Investment Opportunities

For those considering broader investment strategies, it’s worth exploring alternative options. The Motley Fool Stock Advisor service, for example, has identified 10 stocks that have the potential for extraordinary returns, outperforming the S&P 500 by a factor of more than four since 2002. While defense stocks like Lockheed Martin and RTX offer stability, investors may also want to consider high-growth opportunities outside the defense industry to diversify their portfolios and maximize potential gains.

In conclusion, the Pentagon’s end-of-fiscal-year spending spree has provided a substantial financial boost to major defense contractors. Boeing, Lockheed Martin, and RTX have all secured significant contracts, but from an investment perspective, the profitability and growth potential of these companies vary. Lockheed Martin and RTX, with their consistently profitable defense operations, appear to offer more promising opportunities than Boeing, which continues to face challenges in its defense division.