BTIG: NATO's increase in defense spending is beneficial for American contractors, with General Dynamics and Kratos Defense & Security as top picks
BTIG analyst Andre Madrid pointed out that NATO's new defense spending plan could nearly double the market size of U.S. defense contractors over the next decade. He recommends General Dynamics and Kratos Defense & Security as preferred stocks. NATO member countries have agreed to increase defense spending to 5% of GDP by 2035, with defense budgets expected to rise to $3 trillion by 2035, and total military equipment spending reaching $8.8 trillion over the next decade, providing U.S. defense companies with $2.7 trillion in export opportunities
According to the Zhitong Finance APP, BTIG analyst Andre Madrid stated that NATO's proposed new defense spending plan could nearly double the market size of U.S. defense contractors over the next decade. Madrid listed General Dynamics (GD.US) and Kratos Defense & Security (KTOS.US) as preferred stocks.
At last week's NATO summit held in the Netherlands, member countries, excluding Spain, agreed to increase defense spending to 5% of Gross Domestic Product (GDP) by 2035, up from the previously set target of 2%. Of this, 3.5% will be allocated to core defense areas such as equipment, personnel, and operations, while the remaining 1.5% will support infrastructure and defense industrial capacity building.
Madrid's team expects that by 2035, NATO's defense budget could rise to $3 trillion annually, and if the current spending pattern remains unchanged, NATO's total military equipment spending over the next decade could reach $8.8 trillion. For U.S. defense companies, this means $2.7 trillion in export opportunities, nearly double the current level. If defense spending remains at 2% of GDP, the potential export amount for U.S. defense companies would be about $1.4 trillion.
Madrid stated, "Higher defense commitments could nearly double the potential market size for U.S. contractors."
Currently, U.S. companies account for about two-thirds of Europe's military equipment imports, and BTIG expects this ratio to remain stable. Madrid is particularly focused on AeroVironment (AVAV.US), Leonardo DRS (DRS.US), and Northrop Grumman (NOC.US), all rated "Buy," believing these companies are likely to benefit from this trend.
The existing 2% defense spending commitment was proposed in 2006, reinforced after the first outbreak of the Russia-Ukraine conflict in 2014, and received new momentum after the escalation of the conflict in 2022. As of 2024, 23 NATO member countries have achieved the 2% target, and it is expected that nearly all member countries will reach this target by 2025.
Currently, the U.S. bears two-thirds of NATO's defense spending, far exceeding other member countries like Germany and the UK. NATO allies' total annual defense spending amounts to $1.5 trillion, and Madrid expects this figure to double under the 5% spending commitment.
U.S. President Donald Trump, while supporting increased military spending among allies, believes that the 5% target should not apply to the United States.
Madrid added that defense contractors with significant international influence are best positioned to capitalize on this trend, listing General Dynamics and Kratos Defense & Security as preferred stocks
