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Fifty-eight billion dollars. That’s what the Department of War just awarded Lockheed Martin for PAC-3 interceptors, the missiles that have been knocking Iranian ballistic missiles out of the sky for the past five months. It’s one of the largest munitions awards in U.S. history.
Don’t expect to see them anytime soon, though. According to retired Army Colonel Robert Hamilton, the first missiles off that contract don’t arrive until early 2029. The contract isn’t complete until 2032.
Back in June, I wrote that arsenals must be rebuilt, and that the only question was who would build them. Six weeks later, I think the question has changed. It’s not just who will built them but how fast.
The Pentagon Is Racing to Refill an Emptying Arsenal
Before Operation Epic Fury, the U.S. held roughly 2,330 Patriot interceptors. Col. Hamilton puts the number today at around 800. The Center for Strategic and International Studies (CSIS) estimates Patriot inventories below 1,000 and THAAD stocks near 250. Meanwhile, Reuters reports that the Army has expended “virtually all” of its long-range precious missiles, weapons that run north of $1 million each.
Washington has responded at a fast clip. Besides the Lockheed award, the Pentagon has signed framework agreements with Lockheed and Northrop Grumman to triple Patriot production and quadruple THAAD output. Multiyear deals aim to take Tomahawk production from 60 units a year to 1,000, and PAC-3 output to 2,000. The 2027 budget carries $95 billion for munitions alone.
So the money’s there. The bottleneck is somewhere else.
Defense Orders Are Growing Four Times Faster Than Output
Reviewing Bloomberg data, I found that, over the past eight quarters, the combined defense order backlog at the four largest weapons manufacturers, or “primes,” grew 37%, adding more than $150 billion in committed work.
But over that same stretch, actual physical output of U.S. defense and space equipment, as measured by the Federal Reserve, grew only 8%.
In other words, dollars committed are piling up more than four times faster than hardware coming off the line.
Lockheed’s backlog for missiles and fire control jumped from $46.6 billion to $87.9 billion in a single quarter, nearly doubling as the PAC-3 award landed on the books. Over that same three months, national defense equipment production rose 2.8%.
The contract shows up instantly, but the missiles do not.
Decades of Lost Capacity
I want to be clear that none of this has to do with incompetence or contractors dragging their feet. It’s just math.
In the chart below, you can see that U.S. defense and space equipment production peaked in January 1988, at the height of the Regan buildup. Over the following 13 years, as Washington collected its peace dividend, capacity fell 43%. It’s taken 26 years of climbing to get back, and today, output sits just 3.6% above where it stood in 1988.
Look at the dashed line. Every surge since the Cold War, including the post-9/11 buildup, topped out near the 1988 ceiling and rolled over. But now the industry is being asked to restock a five-month war while deterring China in the Pacific.
The Defense Boom Is Only as Strong as Its Smallest Suppliers
Of course, Lockheed doesn’t make Patriot interceptors. It assembles them out of parts bought from hundreds of smaller companies.
When Washington wants more missiles, these smaller firms are the ones that have to add shifts, buy machines and pour concrete. Most of them can’t.
Mark Cancian, senior adviser with CSIS, put it plainly in an interview, voicing what manufacturers tell him: “Show me the money.” They won’t build factories that might sit idle.
Bloomberg’s supply chain data shows why that fear is so hard to overcome. The chart below shows a series of small, mostly-U.S.-based supplier firms, the two exceptions being MTU Aero Engines (Germany) and Melrose Industries (U.K.). The bars on the left show you what percent of the supplier’s revenue comes from manufacturing giant RTX, while the bars on the right show you what percent of RTX’s total costs go to the supplier.
For instance, CPI Aerostructures draws 38% of its revenue from RTX. RTX sends four one-hundredths of one percent of its costs to CPI Aerostructures. Solitron Devices takes 31% of its revenue from RTX, against less than a hundredth of a percent going the other way.
It gets tighter than that. Air Industries Group draws 34% of its revenue from Lockheed and 28% from RTX, roughly 63% of its business from two customers. Mercury Systems runs about 40% across Lockheed, RTX and Northrop combined.
A company earning a third of its revenue from one customer has almost no leverage to demand the long-term commitment it would need to finance a new plant. And that customer has little reason to offer one, because the relationship barely registers on its cost base.
Execution Is Everything
Last thing I’ll point out. Not all backlog orders are money in hand. Northrop discloses that of its $104.7 billion order book, only $45.9 billion is actually funded. The rest is future value Congress hasn’t appropriated yet.
Four of the five major primes carry buy ratings from analysts. RTX is up more than 44% over the past year and now trades without above 6% of the average price target.
I’ve said it before: war is a tragedy, but investors have to deal with the world as it is. And right now, the world as it is has empty magazines, combined with the largest defense checks in modern history.
But I don’t think the winners over the next five years will be whoever books the biggest award. I think they’ll be whoever can actually build the thing.
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