After providing in-depth analyses of some individual defense companies in our Top Government Contractors series (such as L3Harris in part 52 here) we decided to take a sector approach and observe what trends drove Defense company performance in the first half of H1 2023, potentially looking into the second half of the year as well. After covering the Industrial sector in our previous sector article, we plan to highlight the healthcare and information technology/services sector next.
Key points:
* Defense companies delivered a 9.6% revenue increase in H1 2023, with sales at U.S.-based firms up 9.84% Y/Y in H1 2023, while European peers recorded a 9% increase. Companies broadly expect sales growth rates to decelerate into H2 2023, with Europe a possible outperformer.
* Net income margin developments were more nuanced, with companies in our selection split evenly between improving and deteriorating margins. Easing supply chain conditions should bring relief in H2 2023.
* Backlog growth exceeded reported sales growth in H1 2023, coming in at 12.74% on average. The 16.7% increase at European defense companies was well above the 11.42% increase at U.S.-based firms.
* Niche U.S. defense contractors outperformed the U.S. average with 12.7% revenue and 14.18% backlog growth in H1 2023.
* U.S. defense contractors with over 50% government exposure underperformed their U.S. peers, delivering 7.56% revenue and 9.22% backlog growth.
Revenue Developments
Defense companies enjoyed a strong first half from a revenue perspective, with no company reporting a drop in sales relative to the prior year:
Figure 1: Year-over-year revenue trends at select large government contractors
| Company | Revenue growth H1 2023 | Full year 2023 Outlook |
| Lockheed Martin | 4.6% | 2.3% |
|
Raytheon |
10.9% | 9.5% |
| Boeing | 18.4% | N/A |
| General Dynamics | 7.8% | 7.7% |
| Textron | 4.8% | N/A |
| CACI | 6.9% | 5.9%* |
| Oshkosh | 16.7% | 14.5% |
| L3Harris | 11.2% | 6.8% |
| Northrop Grumman | 7.3% | 5.5% |
| BAE Systems | 13.6% | 6% |
| Rheinmetall | 7% | 17% |
| Leonardo | 6.4% | 4.1% |
| Company average | 9.6% |
Source: Company disclosures for H1 2023. *CACI outlook is for Fiscal 2024 (Ending in June '24)
Across the twelve companies in our list, top-line growth came in at 9.6% on average, or 7.55% taking the median between General Dynamics and Northrop Grumman.
Looking at sub-sectors, we can conclude that:
- Growth was strongest at U.S. defense contractors with an average of 9.84%, or 7.8% taking the median.
- European defense contractors delivered marginally weaker 9% top-line growth, or 7% if we take Rheinmetall as a median.
- If we take niche U.S. defense contractors (defined as companies with less than 50% government revenue exposure, with Boeing, Raytheon, Textron and Oshkosh making the list), we see they outperformed the total U.S. average, with growth coming in at 12.7% across the group.
- U.S. defense contractors with over 50% government revenue exposure (Lockheed Martin, General Dynamics, CACI, L3Harris and Northrop Grumman) underperformed the U.S. average, delivering top-line growth of 7.56%
Looking into H2 2023, a broad slowdown in the sales growth rate is expected across the industry, with Rheinmetall being the only exception. However, should current tailwinds to the industry persist, we may see some companies outperforming the mid-range of their latest revenue guidance.
Net Income Developments
Net income margin developments were split 50/50 between improving and deteriorating net income margins:
Figure 2: Year-over-year net income trends at select large government contractors
| Company | Net Income Growth H1 2023 | Net Income Margin Development |
| Lockheed Martin | 65% | Positive |
| Raytheon | 15.3% | Positive |
| Boeing | Loss in 2023 | Negative |
| General Dynamics | -1.5% | Negative |
| Textron | 10.7% | Positive |
| CACI | 10.7% | Positive |
| Oshkosh | 826% | Positive |
| L3Harris | -27.2% | Negative |
| Northrop Grumman | -13% | Negative |
| BAE Systems | 55.3% | Positive |
| Rheinmetall | -6.7% | Negative |
| Leonardo | -22.1% | Negative |
Source: Company disclosures for H1 2023
Looking at the sub-sectors outlined above, the dispersion in results between companies is too great to draw concrete conclusions.
Backlog
We will now highlight backlog developments across companies in our sample:
Figure 3: Year-over-year backlog trends at select large government contractors
| Company | Y/Y Backlog Growth H1 2023 | Book-to-bill Ratio Q2 2023 |
| Lockheed Martin | 17.4% | 1.70x |
| Raytheon | 14.9% | 1.34x |
| Boeing | 18.2% | N/A |
| General Dynamics | 4.3% | 1.2x |
| Textron | 8.5% | N/A |
| CACI | 10.7% | 1.5x |
| Oshkosh | 15.1% | N/A |
| L3Harris | 15.2% | 1.18x |
| Northrop Grumman | -1.5% | 1.14x |
| BAE Systems | 25.6% | 1.76x |
| Rheinmetall | 16.9% | 2.51x |
| Leonardo | 7.6% | 1.3x |
| Company average | 12.74% |
Source: Company disclosures for H1 2023
Backlog growth exceeded reported sales growth in H1 2023, coming in at 12.74% on average, or 15% taking the median. Looking at sub-sectors, we can conclude that:
- European defense contractors outperformed U.S. peers, delivering 16.7% average backlog growth.
- U.S. defense contractors saw their backlog increase by 11.42% on average.
- Niche U.S. defense contractors outperformed the U.S. average with 14.18% backlog growth.
- U.S. defense contractors with over 50% government revenue exposure saw the weakest backlog growth at just 9.22%
Supply Chain Comments
Against the backdrop of positive revenue and backlog developments, but mixed net income results, companies broadly reported improving supply chain conditions and material availability on their latest conference calls, although clearly operations at some individual companies were still impacted by supply chain issues:
Lockheed Martin
We’re going to have to have a more resilient defense production system and one that can scale quickly if we have to. And then the other dimension is to make international production and sustainment operations a part of Lockheed Martin’s future.
Boeing
And with demand strong, the supply side of the system is beginning to settle down. Our focus remains on execution and driving stability in the production and the supply chain and we are making steady progress.
General Dynamics
On the good news side of the equation, supply chain conditions are improving. We still have a significant backlog of late parts, but processes are in place to catch up, deliveries are trending positive and we have greater transparency. In short, the suppliers are more predictable and are complying with catch-up schedules. This will help both revenue and margins as we do less out-of-station work.
Conclusion
Our selection of defense sector companies delivered 9.6% top-line growth in H1 2023, significantly outperforming the S&P 500. Despite backlogs increasing at an even faster 12.74% pace, companies expect a slowdown in sales growth in H2 2023.
Comparing the United States with Europe, the U.S. had stronger sales growth of 9.84% but weaker backlog growth of 11.42% on average. European defense companies saw revenues increase by only 9% in H1 2023 but backlogs shot up by 16.7%, potentially setting the stage for stronger sales growth in Europe in H2 2023.
Niche U.S. defense contractors outperformed U.S. companies with over 50% government procurement exposure on both top-line growth and backlog evolution.
Given the significant impact government contract wins can have on company financials, monitoring public procurement activity remains a smart, yet lesser-known move that can give an advantage when assessing the impact of new tender awards. This was examined in TenderAlpha's 'Government Receivables as a Stock Market Signal' white paper.
To learn more about the ways in which TenderAlpha can provide you with insightful public procurement data, get in touch now!
This article was written by members of TenderAlpha's team and does not serve as a recommendation to buy any stock mentioned within. TenderAlpha is not receiving compensation for it and we have no business relationship with any company whose stock is mentioned in this article.