Thank you so much to EVERYONE this week. You guys gave us enough juice to write through the end of the year.

We’re covering defense contractors and defense spending this week, per OVERWHELMING request.

We also had some other suggestions that we’ll be covering in the last weeks of 2023.

NOTES:

WE’RE OFF NEXT WEEK. Happy Thanksgiving!

Defense Contractors: 6 Exploding Questions

When we think of the defense industry, a lot of us picture a ‘Burn After Reading’ movie scene with a bunch of people in DC having parties and eating cheese on toothpicks.

We’re going to try and break down who’s at these parties, and any places outside of DC where this kind of business gets done.

1. Who are the key players in the industry?

Here’s a very simple graphic detailing the 3 key players:

1. The Defense Industrial Base (DIB): This is stuff like the DoD, etc.
   

2. Defense Contractors: Companies that fulfill orders for weapons, etc. See the table below for the 5 biggest players
   

3. Congress: They gate-keep the defense budget.

As a reference- put the market cap of all these companies together, and you still don’t meet the market cap of any companies in Big Tech.

2. Who do defense contractors do business with, then?

Defense contractors have 1 customer to worry about:

The U.S. Government

The bulk of revenue at each of these companies is earned from various government customers, like the Pentagon, or any intelligence services.

3. Well, what do they sell to the U.S. Government?

We’re gonna come back to this one. See question 6.

4. Well, one customer though, you can only sell so much…right?

Ha! The U.S. customer is addicted to the vape that is the weapons industry.

1. Defense companies have spent most of the last 2 decades in a huge market upswing.

2. Within that upswing, defense companies absolutely crushed it, since about 50% of the defense budget ($842B) goes directly to their services. And there’s heavy sentiment that the gov’t is being gouged.
   

3. Why would that happen? Defense spending goes up every year, the pie is big for everyone, right?
   
   WRONG. Defense as an industry has consolidated…a lot over the last 40 years, bringing the total # of major players to…5. Just 5.

   
   The price gouging is most likely occurring due to reduced competition. Probably at the bottom of the pile at the DOJ and FTC.

   
   cool cool cool.

5. Wait, give me a visual reference to all this money being unlocked in DC.

Well, the Military Industrial Complex could be in your backyard, too. Here’s a graph breaking down the top 5 municipalities based on defense contract spending.

Surprisingly, TX beats VA.

6. You’re talking about ‘Defense Contractors’ like some vague boogeyman . Do they differ in approach/strategy?

Let’s go back to question 3.

We’ll keep it high level. Yes, they do differ, so let’s talk about ‘em.

• Each company has a different core competency/intelligence. It includes everything from the missile/jet to the chips that provide guidance, etc.
  

• Their portfolios look different too: Lockheed has really geared their R&D towards conventional arms/munitions in the last few decades - with 90% of their Gross Revenue attributed to defense sector activities.

• Boeing, on the other hand is a much more diversified company - with only 53% of their top line attributable to defense contract work.

Please note that these total sales include DoD-sanctioned and facilitated sales to foreign governments as well as direct commitments to the DoD.

These 5 Top US firms, in 2021 supplied approximately $200 B of the $600 B global market for armaments.

Also, we’ve left off consulting companies like Booz and Accenture, both of which have huge government contracts. That’s another email, though.

Fun fact: In 2021, Pfizer (yes you read that right - the Pharma giant) actually beat out Northrop Grumman to crack the top 5 DoD contracts by firm with a whopping $11.1 B commitment. This figure represents the US Defense Industrial Base’s purchases of Covid-19 vaccines. 

What AI Made This Week

Have a great week!

Ahmed and Peter