Can You Guess Which Country Is Stockpiling $6.5 Billion Worth of Weapons? (Hint: Its Not Russia)

By Markets Fool.com


U.S. Air Force F-16s flying formation over the Sea of Japan. Photo: U.S. Air Force.

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The United States of America spends more money on its military than the next eight nations combined. (USA! USA!)

This is according to the Stockholm International Peace Research Institute, orSIPRI, which pegs our spending at $640 billion for 2013. Lining up behind U.S. were, as you might expect, China and Russia, respectively spending $188.5 billion and $87.8 billion for the year. But would you care to guess which country ranked No. 4?

Is it perhaps Germany? (Nein).

How about France? (Non).

Great Britain? (Beg pardon, terribly sorry to disappoint you -- but no).

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Drumroll, please
Turns out, the No. 4 military spender in the world for 2013 wasSaudi Arabia, at $67 billion.


Royal Saudi Land Forces show off one of its bigger guns. Photo: Wikimedia Commons.

That's right. Saudi Arabia, with its population of only 29.2 million inhabitants -- of which nearly one in three is a foreign national -- outspent each of France (63.4 million people), the United Kingdom (63.5 million), and Germany (82.6 million). And here's where things get really interesting for an investor in the defense industry: Saudi Arabia isn't just the world's fourth-largest military spender. It's also the world's No. 1 biggest military importer.

According to a recent report from website statista.com, Saudi Arabia spent $6.5 billion importing arms from foreign defense companies in 2014, a 54% increase compared to 2013.That's 25% more than Pakistan, Turkey, and the United Arab Emirates spent, combined.If this trend continues, Saudi Arabia will this year surpass the combined arms imports of India and China, spending an estimated $9.8 billion on arms imports alone.

Turns out, Saudi Arabia just might be the most important arms market on the planet.

Follow the money
And who is selling Saudi Arabia all of these weapons? Funny you should ask -- it turns out, we are.

That is to say, "we" in the form of the Pentagon's Defense Security Cooperation Agency, which vets and coordinates most arms sales between U.S. defense contractors and foreign governments.


One of Saudi Arabia's favorite U.S. weapons -- foes "TOW" the line when faced with Raytheon's missiles. Photo:U.S. Army.

Perhaps you recall how, about a year ago, the DSCA sought congressional authorization for Raytheon to sell the Saudis $1 billion worth of TOW anti-tank missiles.That probably sounded like a lot at the time. But, in fact, it was pretty small potatoes. General Dynamics' subsequent deal to sell the Saudis more than 3,000 light armored vehicles via its Canadian subsidiary, General Dynamics Land Systems-Canada, was at least 13 times as large -- $13 billion.

And even that deal was dwarfed by the arms package the Obama administration brokered with Saudi Arabia in 2010. Valued at upward of $90 billion, that deal was probably the largest international arms sale by anyone, to anyone, ever -- and packed with everything from Boeing F-15 fighter jets and Apache helicopters, to United Technologies Blackhawks, to Terminal High-Altitude Area Defense anti-missile systems from Lockheed Martin .

What it means to investors
Clearly, Saudi Arabia is an important market. And with several Mideast nations making up about a third of the top 10 arms importers on the globe,the rest of the region is no slouch in the spending department, either. To help investors keep track on who's making the most of this booming market, we've prepared this helpful chart of who's who in Mideast arms sales. (Compare it to last year's chart of East Asian arms merchants -- collect the whole set!)

Company

2014 Revenue Sourced From

Middle East/Africa

All International

Raytheon

12.5%

28.7%

General Dynamics

7%

24.7%

L-3 Communications

1.3%*

24.4%

Lockheed Martin

NA

19.8%

Northrop Grumman

NA

13%

Source: S&P Capital IQ (NA = no data available). *Estimate includes revenue from Saudi Arabia only.

Note that these are the major U.S. "pure-play" defense industry companies operating in the region. There are also a handful of large industrial conglomerates that derive some sales from military hardware, but that do even more significant business in commercial wares -- for example, commercial aircraft at Boeing, civilian helicopters and business jets at Textron, elevators (and even more helicopters) at United Technologies.

These companies' civilian segments make apples-to-apples comparisons of their Mideast defense businesses difficult. But despite that caveat, for the sake of completeness, we'll give you their numbers as well:

Company

2014 Revenue Sourced From

Middle East/Africa

All International

Boeing

13%

58.3%

Textron

4.6%

37.5%

United Technologies

NA

62.5%

Source: S&P Capital IQ (NA = no data available).

What should investors take away from all this data? Almost across the board, these companies are getting more of their revenue from the Middle East (and, for that matter, from "international" sales in general) now than they were one year ago. Clearly, if there's growth going on in the defense industry, it's largely happening outside U.S. borders.

As for which company is doing the best job of capturing this growth, Raytheon still holds the commanding lead, deriving more than one revenue dollar in four from abroad, and one dollar in eight coming from the Mideast. Raytheon's rivals are closing the gap, however, with both General Dynamics and L-3 Communications approaching the 25% mark for foreign-sourced revenues coming.

If "international" is where the action is in defense, and if the hottest action is found in the sands surrounding the Persian Gulf -- I'd say these are probably the three defense companies you want to watch.


They may not look like much, but General Dynamics' LAV-25 light armored vehicles are proving a hot commodity among Mideast buyers such as Saudi Arabia. Photo:US Marine Corps.

The article Can You Guess Which Country Is Stockpiling $6.5 Billion Worth of Weapons? (Hint: Its Not Russia) originally appeared on Fool.com.

Rich Smith owns shares of Raytheon Company.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 288 out of more than 75,000 rated members. The Motley Fool owns shares of Textron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.