Ukraine and Gaza wars boost the value of major arms manufacturers

The market value of the main military equipment manufacturers in the United States and Europe has skyrocketed over the past two and a half years, in the wake of the wars in Ukraine and Gaza. This is confirmed in a study by the financial and strategic consultancy Accuracy, which analyzed the performance of the seven main U.S. companies in the industry and their European counterparts, whose stock market capitalization has increased by 59.7% since 24 February 2022, when the invasion of Ukraine began. The rise is much higher than that of the benchmark stock market indexes on both sides of the Atlantic (S&P 500 and Eurostoxx 50), which in the same period recorded increases of just over 13% and 7%, respectively.

The U.S. companies are Honeywell International, RTX Corporation, Lockheed Martin, Northrop Grumman, General Dynamics, L3Harris and Huntington Ingalls. On the European side, the companies included in the study are France’s Safran, Dassault Aviation and Thales; the U.K.’s BAE Systems; Germany’s Rheinmetall; Italy’s Leonardo, and Norway’s Kongsberg Gruppen. Ignacio Lliso, a partner at Accuracy, explains that the companies they selected were those whose activity is heavily influenced by the defense sector.

Although the study covers the period from January 2021 to March 2024, the largest increase in share prices occurred between the third quarter of 2023 (when Israel’s offensive on Gaza began) and the first quarter of 2024. During these six months, the global capitalization of the 14 military industry giants grew by 20%. “In the week following the Hamas terrorist attack on 7 October, the average value of the shares of the companies in the sample increased by around 9%, while the [stock] market remained stable,” says the report, whose findings are based on the Capital IQ database.

The increase in the stock market value of companies meant that share value went from representing 11.1 times their EBITDA (earnings before interest, taxes, depreciation and amortization) to 18.8 times.

But it was not just their share value that soared: the volume of traded shares also did. In the first quarter of 2022, coinciding with the invasion of Ukraine, investors traded shares in European companies worth €1.4 billion, the highest figure in the last eight quarters; while the shares traded in American companies reached a record €1.03 billion in the fourth quarter of 2023, coinciding with the escalation of violence in the Middle East.

The rise in the share price of European companies in the sector was stronger than that of their North American counterparts (129% versus 31%), which Lliso attributes to the fact that in the United States the rise “started earlier and the European stock markets joined in later.” Despite this, the difference between the two groups remains vast: the market value of the seven American giants has reached €532 billion, while that of their European counterparts remains at €230.65 billion.

The profitability of the arms industry has not grown in step with its stock market value, since the latter is derived from the expectation of future profits and the materialization of contracts can be prolonged over a long period of time. “When the war in Ukraine began, we saw that the gap between the relative valuation of companies and their results widened: shares rose while turnover remained the same. Investors are not only looking for immediate profits, but also for medium-term profits,” explains the Accuracy partner.

The average EBITDA margin of the two groups (U.S. and European arms manufacturers) remained stable over this period, ranging from 14.3% at the end of 2021 to 12.7% at the beginning of 2024, although in Europe it increased by 2.1 points (from 11.7 to 13.8%), while in America it fell by 4.3 (from 16.5 to 12.2%), narrowing the gap between the two.

The most profitable business

The highest return was obtained by the American firm Honeywell, specialized in electronics and communications, with an average of 24.2% over the period. On the other hand, the German Rheinmetall, a manufacturer of weapons and ammunition, appreciated the most: its shares rose from €96.7 in February 2022 to €334 in January 2024. That is, they are worth 245% more. “They all benefit from the [war] environment, although some, due to the type of product they invoice, do so more directly,” explains Lliso.

Leonardo's share price rose by 139%, BAE Systems by 101%, Dassault Aviation by 86%, Thales by 76%, Konsberg Gruppen by 64% and Safran by 45%. The share price growth of American companies was somewhat more modest: Huntington Ingalls by 40%, Lockheed Martin by 29%, General Dynamics by 25% and Northrop Grumman by 22%.

In terms of sales, at American firms they grew by 27.47% (€14.1 billion) between the first quarter of 2021 and the first quarter of 2024, while European sales grew by 28.82% (€6.8 billion) between the last quarter of 2023 and the last of 2021. Last year the sales of the seven American companies totaled €246.2 billion, while European companies registered €102.3 billion in sales.

Even when the wars in Ukraine and Gaza are over, the markets are betting on a long period of growth in military spending, with most NATO countries already spending more than 2% of GDP on defense and the rest of the world embarking on a new arms race. “There are very strong capital flows towards the defense sector,” notes Lliso.

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