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This Is Uncomfortable

What a $6 billion anti-terrorist campaign amounts to

Scott Tong Sep 10, 2014
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Among the defense-contractor set, there’s an expectation that the war against extremist group the Islamic State in Iraq and Syria will cost an extra $6 billion next year. That would pay for things like warplanes, drones for surveillance, listening to enemy phone calls and training rebels.

The corporate winners among defense contractors include familiar names. “Boeing and Raytheon make smart munitions,” says Guggenheim Securities aerospace and defense policy analyst Roman Schweizer. “Lockheed Martin or ATK are certainly also in the mix. Northrup Grumman and General Atomics are the two primary drone manufacturers.”

For context, this is war on the cheap. Put the $6 billion estimate next to a defense and war budget of around $560 billion, and it’s a rounding error. Or, consider the price of one laser-guided JDAM smart bomb dropped on an ISIS target.

“The unit price of those is $25,000–$40,000,” says Byron Callan of Capital Alpha Partners. “Now, that’s the price of a car. But in the context of companies that may have revenues of anywhere from $25–80 billion, you have to drop an awful lot of those to really start impacting the bottom line.”

The bigger impact of all this may be political. The current budget environment of strict spending caps — remember the term “sequestration”? — squeezes all contractors. But now, with a new enemy, the appetite for spending on war could grow.

“I think the calculus may be starting to change,” says Yair Reiner of the investment firm Oppenheimer. “With the rise of ISIS, Americans — and I think not just the political class — may be willing to contemplate intervention.”

Further on, winning this fight could mean winning the peace: soldiers, body protection and armored vehicles. Down the road, if the mission creeps, that would be real money.


 

From a defense perspective, $6 billion could seem like chump change, but this graphic by Marketplace’s Marlena Chertock puts the number in perspective:

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