U.S. Arms Manufacturers' Investment Landscape: A Long-Term Track in the Global Geopolitical Crisis

In recent years, geopolitical tensions have escalated, from the Ukraine-Russia conflict to the Israel-Palestine war, with international military relations continuously intensifying. At the same time, the nature of modern warfare has shifted from traditional troop deployments to technology-driven strategies, with emerging military technologies such as drones, precision missiles, and information warfare becoming focal points for countries worldwide. U.S. defense contractors, as leaders in the global defense industry, are shining amid this geopolitical boom. Major countries including the U.S., China, and Taiwan have increased their military budgets year after year, creating unprecedented opportunities for U.S. arms manufacturers.

Why U.S. Defense Contractors Are Worth Watching: Geopolitical Benefits and Moats

The core logic of investing in U.S. defense companies lies in the perfect combination of three key elements. First is the extremely long industry cycle—human civilization has never truly ceased military conflicts; instead, they flare up with shifts in geopolitics. This means demand for defense products is stable and enduring, unlike many civilian industries that fluctuate with economic cycles.

Second is deep competitive barriers. U.S. defense firms possess the most advanced global defense technologies, many of which have spun off into civilian markets. Because of national security concerns, entry barriers are extremely high; suppliers require years of government certification and trust-building. Established industry leaders often have long-term partnerships with the Department of Defense, leaving little room for new entrants to challenge.

Third is geopolitical catalysts. With the Trump administration’s “reshoring” policy and the shift from global interconnectedness to regional confrontation, countries are increasing military spending for national security reasons. This long-term trend is expected to support steady growth for U.S. defense contractors.

Leading U.S. Defense Companies: From Pure Military to Hybrid Models

Within the U.S. defense sector, there are different types of defense contractors. Some are “pure-play” military companies with high military revenue proportions; others are hybrid firms balancing military and civilian businesses, sometimes with civilian revenue exceeding military. Investors must understand this distinction, as it directly impacts returns.

Pure Military Defense Companies

Lockheed Martin (LMT) is the world’s largest defense contractor and a typical pure military company. It focuses on missile systems, aerospace, and fire control systems, with a very high proportion of military revenue. Long-term charts show steady stock price growth, with short-term dips mainly due to broader market corrections. As a pure defense firm, it offers stable profits and continuous dividend growth, making it a strong long-term investment.

Northrop Grumman (NOC) is also a pure defense leader, ranked as the fourth-largest global defense manufacturer and the largest radar producer. Its stock has been steadily rising over the years, with 18 consecutive years of dividend increases. Recently, the company accelerated a $5 billion share buyback program to further reward shareholders. With industry-leading technology and a focus on “strategic deterrence”—integrating space, missile, and communication tech to diminish adversaries’ resolve—Northrop Grumman benefits from ongoing global security concerns. As most countries face security anxieties, even without actual conflicts, military spending tends to rise. Thanks to its technological moat and stable orders, it’s a solid long-term hold.

Hybrid Defense Companies

General Dynamics (GD) is among the top five U.S. defense suppliers, serving all three military branches. It operates in both military and civilian markets, with civilian products like Gulfstream jets. Its military revenue breakdown is approximately 23% Navy, 22% national security info, 18% weapons, 12% mission services, and 25% civilian. Its advantage lies in its high-end maintenance and parts sales to elite clients, such as wealthy individuals, making its business less sensitive to economic cycles. Past crises (2008 financial crisis, COVID-19 pandemic) showed stable profits, demonstrating strong risk resilience. Although growth is slower than pure defense firms, GD has a 32-year dividend increase streak and often returns capital via buybacks. Long service life of military aircraft and weapon systems allows cost control and profit expansion, creating a stable earnings engine. While growth potential is limited, its deep moats make it suitable for risk-averse investors.

Raytheon Technologies (RTX) is also a hybrid defense firm, with both military and civilian operations. Recently, its stock performance has been weak, mainly due to issues in its civilian segment. For example, its parts supplied to Airbus A320neo aircraft have design flaws—using rare powder metals that may cause engine component fractures under high pressure. This has led to lawsuits from Airbus, and over the next 3-4 years, an average of 350 A320neo aircraft will require re-inspection annually, with repair cycles up to 300 days. This impacts revenue and involves legal and customer retention risks. Although military orders remain stable, the civil sector’s problems can drag down overall performance. This serves as a reminder that even with strong military business, systemic issues in civilian operations can offset profits. Investors should monitor RTX’s progress before considering further investment.

Boeing (BA) is one of the five major U.S. defense suppliers, with notable military aircraft like the B-52 bomber and AH-64 Apache helicopter. However, its stock has plummeted mainly due to challenges in the civilian market. The 737 MAX crashes in 2018-2019 led to global grounding, compounded by COVID-19 impacts, severely affecting earnings. Additionally, Boeing historically relied on U.S. and European government subsidies to dominate the market, but rising U.S.-China trade tensions have spurred Chinese airlines to develop domestic aircraft, threatening Boeing’s market share. From an investment perspective, military revenue should remain stable, but the civilian outlook is uncertain, making Boeing more suitable for bottom-fishing than chasing rallies.

Caterpillar (CAT) is often listed as a defense concept stock but actually derives less than 30% of revenue from military-related activities; most income comes from industrial equipment. Post-conflict reconstruction and disaster recovery can boost demand for construction machinery, indirectly benefiting Caterpillar. It’s a “semi-defense” stock, with performance more tied to global infrastructure investment and commodity markets. Similar companies include FedEx (FDX), which has handled military logistics, and some firms producing military gear like steel cups or boots—classified as defense stocks mainly due to their government clients.

How to Choose Defense Stocks: Military Revenue Share and Civilian Risks

The primary principle in investing in U.S. defense companies is assessing the military revenue proportion. If a company’s military sales are too low and most revenue comes from civilian markets, its stock price and profits may not fully benefit from the defense boom. For example, while Boeing and Raytheon have military segments, their civilian business issues can suppress overall growth.

Second, evaluate whether the company aligns with future demand trends. Modern warfare emphasizes technology and efficiency over manpower. Drones, precision missiles, and cyber warfare are more promising than traditional land-based products like uniforms or armor, which have limited order growth. Additionally, the focus of global geopolitics on naval and air power suggests that land military spending may not increase proportionally.

Third, closely monitor civilian market developments. Even if military prospects look good, systemic problems in civilian sectors—such as technical flaws, increased competition, or economic downturns—can drag down overall stock performance. Investors should thoroughly analyze a company’s business composition, competitive landscape, and risks before investing.

Opportunities in Taiwan’s Defense Stocks: New Opportunities Driven by Defense Needs

The Taiwan Strait remains a geopolitical hotspot, with both Taiwan and China increasing their military budgets in recent years. This creates new opportunities for local Taiwanese defense companies.

Thunder Tiger (8033.TW) started as a remote-controlled model aircraft manufacturer for toys. With rapid advances in drone technology and military applications, the company has gradually shifted toward defense supply. Its stock has fluctuated but shows growth potential as demand for military drones rises.

Hanshyn (2634.TW) is closer to Boeing’s model, operating in both defense and civilian sectors. Its military business mainly involves trainer aircraft, while its civilian segment focuses on maintenance and parts sales. Orders are expected to grow with expanding drone markets and defense needs. Compared to Boeing and Raytheon, which face operational issues, Hanshyn’s diversified business—covering maintenance, parts, and training aircraft—offers better risk resilience. As long as defense demand remains stable, its maintenance and service markets can generate steady income. Its stock performance has been relatively stable, making it attractive for investors.

Three Moats for Long-Term Defense Stock Investment

Defense stocks derive long-term value from three core moats:

First: An Ever-Running Long Track

While many consumer habits are replaced by technology, conflicts and military needs have persisted throughout history. Unlike consumer electronics or apparel, defense demand is enduring. This long cycle means defense companies don’t need to worry about market extinction—only about maintaining technological leadership and cost efficiency.

Second: High Barriers from Technological Leadership

Defense firms possess cutting-edge technologies often more advanced than civilian counterparts. The most sophisticated tech is developed in labs and military settings, with the military often upgrading to next-generation systems before they reach civilian markets. This creates a technological gap of multiple generations. Entry barriers are extremely high due to trust, certification, and exclusivity—many critical technologies are supplied by a few firms, making established leaders nearly irreplaceable and deepening their moats.

Third: Stable Government Customers

Major clients are government agencies, which are highly stable and creditworthy. Governments prioritize national security and rarely let key defense suppliers fail. This customer base provides predictable revenue streams and reduces operational risks, offering a significant advantage over typical private companies.

Stock Selection and Long-Term Outlook

Based on the above, the key considerations for investing in U.S. defense stocks include:

• Accurately assessing military revenue share: Ensure the company’s military sales are substantial and expected to grow. Pure defense firms like Lockheed Martin and Northrop Grumman benefit directly from defense booms, while hybrid firms like General Dynamics offer more resilience.

• Evaluating civilian business risks: Even with promising military prospects, systemic issues in civilian segments can offset gains. Deep understanding of market position, competition, and risks is essential.

• Monitoring technological trends: Confirm that R&D aligns with future warfare needs—drones, precision weapons, cyber warfare—rather than outdated systems.

• Keeping an eye on geopolitical shifts: While the probability of war remains low, geopolitical tensions influence military budgets. Continuous geopolitical awareness is vital for long-term investment.

Given current global trends, U.S. defense contractors have significant investment potential. Increasing military budgets worldwide and rising geopolitical tensions favor their growth. As global defense industry leaders, they are poised to benefit from this long-term trend. However, careful stock selection—distinguishing pure defense from hybrid firms, understanding civilian risks, and assessing technological relevance—is crucial to maximizing returns.

Defense stocks’ deep moats and low risk of corporate collapse make them suitable as defensive assets in a portfolio. The key is choosing the right companies, considering military revenue proportions, technological leadership, civilian market risks, and financial health to fully capitalize on the geopolitical tailwinds.