There Will Always Be War

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Includes: BA, BAESY, EADSY, FINMY, GD, LMT, NOC, RTN
by: Barker Report
Summary

Some of my avid readers have asked me why no Brexit posts lately, especially when we are so close to Brexit.

Well, I think the general public has reached a saturation point on Brexit-related stuff.

In the meantime, I have noticed something interesting going on which is mildly related to Europe and the pull Germany has on it.

Some of my avid readers have asked me why no Brexit posts lately, especially when we are so close to Brexit. Well, I think the general public has reached a saturation point on Brexit-related stuff, and unless there is anything interesting to say, I will refrain from saying it.

In the meantime, I have noticed something interesting going on which is mildly related to Europe and the pull Germany has on it.

War is probably the single most reliable event in world history

When I was little, an aunt told me the best businesses to get into are food, medicine, or funerary services, since everyone must eat, gets sick, and eventually dies. Unfortunately, there is huge competition in those sectors, many of which are over-saturated; and, unless you want to run your own funeral parlor, there aren't many listed businesses in which to invest. But she overlooked one of the most profitable businesses in the history of the world: War.

Since the beginning of times, there has been war. War is probably the single most reliable event in world history (reliable as in you can always count on it being there). Even after World War II ended, there were still wars going around in 1945 before the next major conflict - the Korean War - broke out.

Of course, governments from all countries strive to achieve peace; but even in peace times, a well-armed and trained military is key to preventing war. Be it a nuclear deterrent, or simply a superior military power. Nobody put it better than Howard Stark in The Avengers: "Peace means having a bigger stick than the other guy."

Peace means having a bigger stick than the other guy" - Howard Stark

9 out of the Top-10 weapons manufacturers worldwide are publicly traded companies (the 10th is a Russian state-owned entity). But most of the real arms companies - I define them as those where weapons sales comprise over 75% of their annual revenue - are American. In fact, all of them with the exception of Boeing (NYSE:BA) and General Dynamics (NYSE:GD) fall into that category. Their European counterparts have relatively smaller exposure, with only two companies falling into that category: British giant BAE Systems (OTCPK:BAESY), and Italy's Leonardo (OTCPK:FINMY).

Why is all this all of a sudden interesting? Because Germany has halted all arms exports to Saudi Arabia, as a consequence of last year's killing of a Saudi reporter in Istanbul. The ban doesn't only relate to Germany-produced arms, but to any weapons that contain German technology or parts. This has prompted the likes of Airbus (OTCPK:EADSY), and BAE Systems to go up in arms (pun intended).

According to the Stockholm International Peace Research Institute, the UK sells to Saudi Arabia more than France, Spain, Italy, Switzerland, Canada, and Germany combined. And since BAE Systems is by far the biggest British weapons manufacturer, it is fair to assume the lion's share of those sales are done by them. In the US, Raytheon Company (NYSE:RTN) has the highest sales to Saudi Arabia as a percentage of total revenue.

The logical risk-neutral trade, in this case, would be to short BAE Systems and long Raytheon, and it seems someone picked up on it recently. Check out the year-to-date performance of the companies vis-a-vis each other.

Screen Shot 2019-02-25 at 12.18.24 PM.png

For even if you ignore the event-driven trade, you can rest assured that a good weapons manufacturer such as Raytheon, Lockheed Martin (NYSE:LMT), or Northrop Grumman (NYSE:NOC) will add some solid returns to your diversified portfolio. I would just stay away from BAE Systems for the foreseeable future.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.