While the United States-led air campaign against Islamic State is making little headway, things have proven much more positive for the guaranteed winners of the latest iteration of the Iraq War: American defence contractors.

In September, we noted that Australian investors like Macquarie Bank and AMP stood to make a motza from the dramatic rise in the share prices of key US defence contractors Raytheon, Lockheed Martin, Northrop Grumman and General Dynamics, all of which had surged to their highest-ever prices in the wake of the air campaign against IS. Mac Bank and others will be delighted to know that since then, the companies have surged to even greater heights. Raytheon is now up 16% since US President Barack Obama announced airstrikes on August 7, despite a slump in October when share markets underwent a sharp, but temporary, drop. That’s compared to 7.5% for the NASDAQ and about the same for the Dow Jones. Lockheed is up nearly 15%; unlike Raytheon, which hit a new record high in the days after it announced better-than-expected profits and a rosy outlook for the next 12 months, Lockheed’s results released a fortnight ago showed an earnings fall, but it still exceeded expectations and the stock went on to hit a new record.Clearly investors expected a long and profitable conflict ahead.

Northrop Grumman is up nearly 14% and also hit a new record high last week despite reporting a fall in earnings. But the real star performer is now General Dynamics, the share price of which from late October blasted past all previous highs and is now up nearly 24% since August. Unlike its Falls Church, Virginia, neighbour Northrop, GD lifted profits by 7% (helped by new orders such as $75 million to supply the US Army with Hydra-70 rockets, fired from the Apache choppers now being deployed against IS). That leaves the fantastic four just off record highs and far ahead of the Nasdaq.

As we noted earlier this week, Northrop Grumman will shortly join Raytheon and Lockheed Martin (and General Dynamics) in establishing an Australian subsidiary. And yesterday, Northrop announced a grant to the “Australian Centre for Cyber Security to promote cyber advancements for Australia’s future”. The centre provides “cutting-edge, international thought leadership in cyber security through research, education and industry engagement” (if someone could ever explain to Crikey what “thought leadership” actually is, that’d be great). Northrop claims it has “a deep understanding of the breadth and complexity of cyber” and we can only agree. Courtesy of jailed journalist Barrett Brown, Crikey readers know that Northrop for years conducted a mass surveillance program of Arab citizens at the behest of the US military. Doubtless that provided a “deep understanding of the breadth and complexity of cyber”.

The smart money, however, might start to drift elsewhere. This week the likely chairman of the US Senate Armed Services Committee, John McCain, reiterated his view that an air campaign wasn’t enough in Iraq/Syria, and that combat forces were needed. “They are winning right now,” McCain said about IS. “Look at Kobani. They are able to hold off American airpower and whoever else is fighting now for weeks. And everybody’s saying it’s a great success that they haven’t taken Kobani. Really?” Ground troops are where the big money is to be made in wars because troops requires bases and services — the biggest winner of all from the previous stage of the Iraq conflict was Dick Cheney’s old firm, service provider KBR, which secured nearly $40 billion in contracts in Iraq. But the once-mighty KBR has been struggling for two years. As the war on IS shifts to a ground campaign, the clever investor will try to identify who’s best placed to take advantage …

Peter Fray

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Peter Fray
Editor-in-chief of Crikey