Watch CBSN Live

Chemring Continues To Do Well From Current Defense Spending

The British company Chemring Group (CHG:L) just announced their recent quarterly results and they are doing very well. The company produces ammunition and pyrotechnic devices for the U.S. and U.K. military as well as some other customers. Due to the operations in Iraq and Afghanistan over the last nine years the demand for their product has grown quite well.

The company reported that in the year ending 31 October that revenues increased almost $200 million to about $800 million from the year before. Profits were up to almost $64 million to about $150 million. The company is also planning to expand their presence in the United States by purchasing Allied Defense Group (ADG) which will also help their overall piece of the ammunition production market.

The question is though for Chemring as other companies that have grown as the U.S. commitment to Afghanistan and Iraq has as well is how will they keep up this kind of performance in the future? Right now it looks like the 2011 budget will keep spending up but it is almost a given that in the near future there will be a real decline in the U.S. defense budget. The English budget is already under pressure but Chemring is helped by the fact that Afghanistan will take precedence over investing in new programs. As long as this continues the English portion of their business will remain fairly steady.

Many focus on the large defense contractors making new, advanced systems but there is a great deal of money in support for the operating forces. The U.S. troops needs fuel, food and ammo. Chemring will still have a market as long as this continues. The 2011 budget is already indicating some shift away from the Operations & Maintenance side of the business as the Obama Administration begins to focus on what programs it wants to invest in for the future.

Chemring has the money to buy other companies which will allow some diversification if necessary. They also like a lot of companies will be able to look overseas to find contracts. There will also be contracts to keep the Iraqi and Afghanistan security forces supplied after the U.S. and U.K forces leave. The key is how fast the defense budget declines when it comes to O&M. In the Seventies and Nineties the last two times it saw major cuts operational readiness and supplies were reduced. Much of the available money went into new weapon systems. If this happens again a company like Chemring could see worse days ahead.