An investor’s introduction to the defense industry

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Introduction to the defense industry

The defense industry is a major contributor to the US economy. Together with the aerospace sector, it contributes almost 2.3% of the country’s gross domestic product (or GDP). It also provides direct employment to more than 1 million people and indirectly, to more than 2 million people.

Having said that, the importance of the industry stems from the strategic role it plays in its country’s security. A well-developed and modern defense system is necessary to provide a sense of security to the country, especially in times of growing global unrest and political tensions.

Defense Revenues

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Important players in the industry

The defense industry is highly concentrated. Four or five large firms enjoy the maximum share. Lockheed Martin Corporation (LMT) is the world’s largest defense contractor with total sales of $45.35 billion in 2013. It’s followed by Boeing Company (BA). Meanwhile, Boeing is a vertically integrated company. And, if you combine its defense interests with its aerospace business, it’s actually the US government’s largest contractor with sales totaling $86.62 billion in 2013.

BAE Systems is the world’s third-largest defense contractor. It’s followed by Raytheon with $23.71 billion in sales in 2013. Raytheon is also the third-largest defense contractor in the US. With $32.22 billion sales in 2013, General Dynamics Corporation (GD) is the world’s fifth- and US’s fourth-largest defense company. It’s followed by Northrop Grumman Corporation (NOC) with $24.66 billion sales.

For investors looking for an introduction to the defense industry, all of these companies are part of the Industrial Select Sector SPDR Fund (XLI) that tracks the Industrial Select Sector Index.

Key indicators

The purpose of this series is to analyze key indicators of the defense industry’s well-being, including world economic growth, global defense spending, modernization of fleets, growth of emerging nations, and political unrest.

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