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US & Japan Vow to Strengthen Defense Ties: Stocks to Benefit

The U.S. diplomatic and defense leaders recently participated in a virtual meeting with their Japanese counterparts amid rising threats in the Indo-Pacific region posed by China. Ministers at both ends also exchanged their concerns about North Korea’s recent advancement in nuclear and missile development activities.

Such emerging defense threats led both these allies to decide on signing a new defense collaboration deal, as stated by U.S. Secretary of State, Antony Blinken. This should benefit stocks like Lockheed Martin LMT, Raytheon Technologies RTX and Northrop Grumman NOC.

What’s Driving the Collaboration?

Tensions between China and Japan in the East China Sea continue to increase. Japan fears that China’s coercive activities in this region might undermine its administration of the Senkaku Islands, thereby disrupting regional peace and stability. Japanese ministers also reiterated their strong objections to China’s unlawful maritime claims, militarization and coercive activities in the South China Sea.

North Korea, which was absent from defense news for some time, is back in the spotlight after hurling missiles. North Korea test fired its second ballistic missile targeting South Korea at the start of 2022. Such activities not only put South Korea in danger but also threaten the peace and safety of Japan and the surrounding areas of the Indo-Pacific region.

Also, defense challenges posed by Russia have been a cause of concern. Moscow’s military buildup on Ukraine’s borders and its increasingly harsh rhetoric not only threaten Ukraine’s sovereignty and territorial integrity but peace and stability across Europe.  Beijing and Moscow are deepening their military cooperation, which might become a significant threat for the United States and its allies.  

These emerging threats have forced the United States and its long-term ally to enhance their readiness and strengthen integrated deterrence capabilities through a expanded defense collaboration.

Defense Stocks to Benefit

It is quite evident that enhanced defense ties between the United States and Japan will boost U.S. defense stocks that already have a well-established base in Japan. These include:

Lockheed Martin: The company delivers cutting-edge technologies and innovations to support the future prosperity of Japan and its communities. More than 550 military helicopters have been produced for the Japan Self-Defense Forces under manufacturing license agreements with Sikorsky, a unit of Lockheed. LMT also delivers its F-35 aircraft as well as Aegis Combat System to Japan.

Lockheed has a long-term earnings growth rate of 3.6%. The company delivered an average four-quarter earnings surprise of 63.28%.

Raytheon: Japan is working with Raytheon and the Missile Defense Agency (MDA) to develop and deploy the next-generation SM-3 Block IIA missile, which will provide a larger area of defense against more sophisticated threats. The missiles will be deployed on Aegis cruisers and destroyers to defend against short-to-intermediate range ballistic missile threats in the midcourse phase of flight.

Raytheon boasts a long-term earnings growth rate of 13.2%. The company came up with an average four-quarter earnings surprise of 9.06%.

Northrop Grumman: The company has a long history in Japan dating back to the late 1950s when the Japan Self-Defense Force (JSDF) used the Grumman Avenger aircraft for maritime patrol, the Albatross aircraft for search and rescue, and the Tracker aircraft for anti-submarine warfare. The close partnership with Japan continues today with Northrop Grumman providing support to all the major branches of the JSDF on a range of defense, security and information systems programs.

Northrop has a long-term earnings growth rate of 9%. The company delivered an average four-quarter earnings surprise of 14.74%.

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