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This outstanding article from The Diplomat.com illustrates the increasing naval arms race that is evolving in the Asia-Pacific.

This has implications for many defense oriented firms but, for smaller firms making products for this sector, the incremental expenditures can become quite material. Case in point, Sparton Corp. (NYSE:SPA), which has around 25-35% of its revenues generated being the only US-owned (and one of only two producers in the free-world) designer and manufacturer of various sonobuoy products for the US and other free-world navies. The incremental impact of growth to the smaller $60 million market cap Sparton Corp. can be multiples more than to a behemoth $29 billion Lockheed Martin (NYSE:LMT) or $18 billion Northrop Grumman (NYSE:NOC).

Sonobuoys are a relatively small expendable sonar system that is dropped/ejected from aircraft or ships conducting anti-submarine warfare. Being a consumable protecting our fleet, as our fleet deploys more in an era of increasing and more diverse submarine threats, sonobuoy use will grow. In fact, a November 2009 investor presentation made by Sparton (see slide 18) highlights projected multi-year growth in the US Navy budget for sonobuoys. In the impending arms race, other countries will increase their use and need of this consumable as well. (Sparton released details on some recent foreign sonobuoy sales contracts here.)

With 10 million shares outstanding and a stock price of around $6/share, a little bit of growth in sonobuoy sales from the increasing arms race, described in the above article, may take Sparton Corp stock a long way.

Disclosure: Long presently with a 13D filing. This author may buy or sell shares at any time.

Source: Sparton: Ready to Cash In on the Naval Arms Race