Strategy Analytics has released a series of reports, that bring together strategic analysis and commentary on twenty of the world’s major defense industry focused companies. The reports outline financial performance covering 2007-2012 and discuss activities within the defense sector, highlighting core strengths, perceived weaknesses and overall competitive positioning in the market.
Following a sustained period of growth, revenues as well as profitability dropped for the defense industry in 2009, potentially marking the beginning of a downwards spiral. However revenues stabilized in 2010 and increased year-on-year in 2011.
Early analysis and indicators suggested that revenue growth and profitability would continue to be maintained in 2012 and this is being affirmed as results are released by companies in Q1 2013. This is despite the uncertainties surrounding sequestration and the “fiscal cliff” in the US as well as budget uncertainties in European and other international markets.
Moving into 2013, maintaining profitability will be the challenge for the industry especially if revenue growth starts to stall. The US elections did not result in greater clarity coming from the political leadership on resolving the issue if budget cuts without resorting to sequestration and while sequestration was offset for two months at the beginning of 2013, there is still no clear resolution in sight. A potential future scenario could see legislation coming into play that offsets sequestration even further through to the end of 2013 (calendar-year). The two political parties will continue to engage in negotiations through the end of the calendar year and the industry will end up operating within essentially a “continuing resolution” framework.
In terms of rankings, Boeing and EADS continue to lead the pack over the 2007 to 2012 timeframe. Results to date coupled with estimates for the full year show that Boeing will pull away from EADS in 2012, driven by a significant ramp-up in the commercial aerospace segment.
While EADS closed the gap with Boeing over 2010 and 2009, the company has not been able to maintain growth in 2012 and preliminary estimates suggest that 2012 revenues will be flat to slightly down and not emulate the commercial aerospace success enjoyed by Boeing.
United Technologies is consistently in third position over the same timeframe with revenues growing over 2010-2011, but expected to flatten out in 2012.
The three companies above all have a mixed portfolio with commercial areas supplementing defense revenues. From a more defense-orientated perspective, Lockheed Martin generated over $47 billion maintaining an overall fourth position in the revenue rankings.
Other defense focused companies featuring in the top ten revenue rankings include BAE Systems, Northrop Grumman and Raytheon joined with Honeywell, Mitsubishi Heavy Industries and General Dynamics generating revenues that couple defense markets with other diverse portfolios.
The challenge for all companies active in the defense sector will be maintaining historically positive profit margins by targeting high growth sectors and international markets outside of US and Europe. While trailing the sampling of companies considered in this report in terms of revenues, Cobham has consistently been one of the more profitable companies and is forecast to lead the pack in 2012, with profit margins approaching 11%.
Raytheon is placed second in the profitability rankings for 2012 and has been a consistently profitable operation for the 2007-2012 timeframe. United Technologies is arguably the most consistent performer, holding a third position in terms of profitability as well as being ranked third in the revenue rankings for 2012.
While Boeing and EADS are expected to command first and second positions in terms of revenue rankings in 2012, both companies are estimated to fall outside the top ten profitability rankings for 2012 with Boeings profit margins averaging around 5% over the 2007-2012 timeframe. EADS profitability averages out at less than 1% for the same timeframe and is impacted by losses in 2007 and 2009.
Overall, the industry has managed to maintain both profitability and revenue growth even as defense budgets come under increasing pressure. Radar, communications and EW systems capabilities will increasingly be underpinned by advanced component technologies while the challenges of maintaining integrity in the network and protecting the users, platforms, systems and devices operating in a net-centric environment will provide fresh avenues of opportunity in 2013.