Joakim Agerback is the manager of Finserve's Global Security Fund and has previously written in FSN Perspektiv. Joakim Agerback manages the fund together with Shayan Heidari. In April, Finserve and Försvarssektorn Nyheter jointly held the seminar Defense Meets Finance. New arrangements for Defense Meets Finance are scheduled next week in Malmö on October 7, Gothenburg on October 8 & Stockholm on October 9. In today's text, Finserve Global Security Fund looks back and reviews defense companies' reports from Q2 and what is expected for the upcoming quarterly reporting.

Ahead of the upcoming Q3 reports for the defense sector, we look back at the Q2 reports and what has happened during the period.

The NATO summit in Washington in July was an important milestone for the global defense sector. Decisions made during the meeting will shape the alliance's future with a focus on improved defense capabilities, strengthened global partnerships, and a firm commitment to Ukraine.

NATO leaders reaffirmed their support for Ukraine and described its path to full NATO membership as "irreversible." To show solidarity, member states pledged approximately 40 billion dollars to Ukraine over the coming year.

Additionally, the summit emphasized the need to further develop NATO's Integrated Air and Missile Defense (IAMD) systems, which was later underscored by a significant 700 million dollar contract with RTX for Stinger missiles. The meeting also highlighted NATO's global reach by strengthening ties with partners in the Indo-Pacific region and the European Union.

European companies benefited from increased military spending during Q2

The summit, along with commitments made by European countries so far this year, indicates that defense spending remains stable. This is driven by the need to rebuild and strengthen defense in Europe. Quarterly reports from leading defense companies in Europe confirm this trend.

  • BAE Systems raised its full-year guidance and reported a record-high order book of £74.1 billion. Revenue increased by 13% as did EBIT. BAE Systems' strategic partnerships in AUKUS and defense agreements with Australia may further boost growth. BAE has signed agreements with Australia to produce a new fleet of nuclear-powered submarines and deliver three Hunter Class frigates.
  • Rheinmetall reported a sales increase of 49% supported by a steady stream of orders for ammunition and weapons. The increased global demand for ammunition has led the company to expand its infrastructure. Rheinmetall confirmed the acquisition of a majority stake in Resonant Holdings to increase the production of propellants and explosives.
  • Saab reported better-than-expected quarterly profits and had the second-highest order bookings in the company's history. The company is expanding its production capacity in Sweden, India, and the USA while increasing its workforce by 1,600 employees during the first half of the year.
  • Leonardo in Italy reported double-digit growth across all key indicators during the first half of the year. In recent months, the company has completed its goal of selling non-core assets such as the sale of a submarine unit to Fincantieri. At the same time, they have formed new pan-European alliances such as a joint venture launched with Rheinmetall.
Strong results from the American defense industry

In the USA, Lockheed Martin was the first company among the major defense companies to report. They reported strong results due to continued strong demand for F-35 fighter jets. The company raised its guidance for 2024 and increased its revenue forecasts by 1.75 billion dollars. Other major American defense companies including RTX, General Dynamics, and Northrop Grumman followed suit and exceeded all expectations.

The quarter, however, presented mixed results for aircraft manufacturers Boeing and Airbus. Aircraft manufacturers Boeing and Airbus faced challenges where Boeing reported revenues of 16.9 billion dollars but continued to struggle with safety issues while Airbus reduced its production targets due to supply chain problems.

The most notable M&A activity during the quarter was Honeywell's acquisition of CAES Systems for 1.9 billion dollars, a strategic move to strengthen capabilities in automation and defense, particularly in programs like the F-35 and EA-18G.

In summary, the NATO summit and the strong results of leading defense companies highlight a period of growth in the global defense sector driven by increased needs for defense capabilities due to geopolitical tensions.

The graph above shows the structurally high growth in the defense industry. We will continue to have elevated geopolitical risk and the Western world has a great need to strengthen its defense capability over time.

The defense sector still stands out as a strong investment theme over a longer period.

For more information, follow Finserve Global Security Fund I here.

October 4, 2024

Shayan Heidari and Joakim Agerback
Managers of the Finserve Global Security Fund I