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Defense manufacturers cashing in on Trump's global arms push

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A U.S. soldier stands guard as a Lockheed Martin F-35 Lightning II aircraft is moved, on the eve of the 52nd Paris Air Show at Le Bourget Airport near Paris, France June 18, 2017.© Provided by CNBC A U.S. soldier stands guard as a Lockheed Martin F-35 Lightning II aircraft is moved, on the eve of the 52nd Paris Air Show at Le Bourget Airport near Paris, France June 18, 2017.

Foreign arms sales are growing in importance to the top line of big defense firms and may get an added boost this year due to initiatives by President Donald Trump.

Sales to allies and other friendly countries also have allowed American defense companies to extend production lines that otherwise might be shuttered or downsized.

Trump's personal involvement in defense sales also hasn't gone unnoticed, whether touting $350 billion in weapons to Saudi Arabia last May or suggesting in November that Japan should buy more U.S.-made equipment to shoot North Korean missiles "out of the sky."

Lockheed Martin and Raytheon, two defense companies with upcoming earnings reports, stand to benefit from increased international sales over the next few years, according to analysts. A lot of the recent growth in U.S. defense sales is in missile defense systems and Lockheed's F-35 stealth fighter jets.

"We're seeing a global upturn in defense spending," said Peter Arment, a defense analyst at Robert W. Baird. "We're seeing Europe, NATO, the Middle East, Asia and U.S. domestic."

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For defense companies, international weapons sales can sometimes be more lucrative too. Arment said direct arms sales from U.S. defense companies to foreign countries "can have a higher margin" than going through Washington's Foreign Military Sales program.

Reuters reported earlier this month that the administration plans as part of its new "Buy American" plan to have embassy personnel "help drum up billions of dollars more in business overseas for the U.S. weapons industry."

"This is the government's job in many ways," Roman Schweizer, a Cowen defense analyst and former government acquisition official, told CNBC.

Regardless of the administration's new plans, Schweizer said there are diplomats and other federal workers at embassies around the world already actively promoting U.S. defense exports.

"We have used foreign military sales to help friends and allies around the world and also to help U.S. defense manufacturers around the world," Schweizer said.

However, Reuters said the White House's plans will be "going beyond the limited assistance" now provided by overseas American military attaches and diplomats.

The White House didn't respond to CNBC's request for comment.

Remy Nathan, vice president of international affairs at the Aerospace Industries Association, said the Arlington, Virginia-based industry trade group representing some top American defense companies "is very much in favor of enhancing" the current arrangement.

Specifically, the administration wants to make it easier to export U.S. defense products abroad, whether drones, aircraft or ships. It comes at a time when the Chinese are getting more aggressive in selling weapons overseas.

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The Trump administration has already relaxed rules allowing more military sales to countries such as Saudi Arabia, which has been accused of war crimes by some human rights groups. Also, the administration lifted human rights conditions for arms sales to other countries, including Bahrain.

In May, when he visited Saudi Arabia on his first foreign-nation visit, the president announced a massive, multiyear arms deal with the kingdom that he said would add hundreds of thousands of U.S. jobs. But some questioned whether all of the weapons were part of a new agreement.

Even so, an expanded "Buy American" program in defense helps the administration in its efforts to boost manufacturing jobs.

The U.S. had nearly $42 billion in foreign military sales during fiscal 2017, up from $33.6 billion in the previous year, according to the Defense Security Cooperation Agency. There is an expectation that foreign military sales could grow again this fiscal year due to increased global tensions and efforts by U.S. allies to increase their overall defense spending.

Even neutral Sweden is increasing its defense spending due to worries about a more aggressive Russia. Also, a Cold War-era mentality in Sweden led the government to recently reissue information about civil defense to some 4.7 million households.

For weapons, Sweden is looking to buy a $1.2 billion Patriot air-and-missile defense system from Raytheon.

In November, Poland obtained U.S. State Department approval on a $10.5 billion purchase of the Patriot system. Romania, another NATO country, was cleared in July to buy the Patriot system.

In all, Raytheon has built more than 220 units of the Patriot system, delivering them to customers in 14 nations worldwide.

Raytheon also has benefited from recent anti-ballistic missile sales to Japan. Japan's government also recently approved the purchase of the Lockheed-made Aegis Ashore missile defense system.

Raytheon's international sales made up about 32 percent of its total sales in the first three quarters of 2017. When it reports year-end results Thursday it's possible the company will mark the 14th consecutive year of international sales growth.

Lockheed's F-35 stealth fighter aircraft is now the driver for its foreign defense sales growth. Of the nine original F-35 partner countries, six how have jets in their fleet. The planes are not manufactured only in the U.S. but also in Japan.

Lockheed CEO Marillyn Hewson said in October during the previous earnings call that the company was on track in 2017 to have 30 percent of sales come from overseas, up from 27 percent in 2016. Lockheed is scheduled to report its full-year 2017 results on Monday.

Lockheed won a $3.8 billion deal last year to sell F-16 fighter upgrades and new aircraft to the government of Bahrain. According to Hewson, the contract is expected to extend the F-16 production beyond the 2021 timeframe.

Similarly, Boeing's F-15 fighter production stands to benefit since the U.S. government announced last month that Qatar will buy 15 of the aircraft.

Production for the F-15QA could start next year and extend assembly-line work into 2022. Also, the contract is good news for numerous suppliers who get work for everything from the components to the avionics and airframe systems.

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