Why Is Bahrain Buying $2.2 Billion in Main Battle Tanks From General Dynamics?

Located in the Persian Gulf, offshore and roughly equidistant from both Saudi Arabia and Qatar, Bahrain (population 1.6 million) is a tiny island, approximately one-quarter the size of Rhode Island. And the most important detail from all of that is: Bahrain is an island.

So why is Bahrain wanting to buy 50 main battle tanks from General Dynamics (NYSE: GD)?

Tanks on an island? Why?

I admit that's the first question that leapt to mind after learning last week that the U.S. Defense Security Cooperation Agency (the foreign arms sales division of the Pentagon) has notified Congress of a Bahraini request to buy 50 Abrams tanks, along with 28 assorted support vehicles (tank recovery vehicles, breacher vehicles, and bridge-layers). And I have to say that DSCA's announcement is pretty silent on that point -- aside from blandly observing that the tanks "will improve Bahrain's capability to meet current and future threats."

What it does say is why the U.S. State Department approves of the arms sale: to "support the foreign policy and national security objectives of the United States by helping to improve the security of a Major Non-NATO Ally." This suggests that, for whatever reason Bahrain wants the tanks, it's probably going to get them.

DSCA also confirms for us the total value of the arms package -- $2.2 billion -- and identifies the several defense contractors who will benefit: BAE Systems, Honeywell, Leonardo DRS, Lockheed Martin, RTX -- and General Dynamics itself, of course, the primary beneficiary of the sale.

It may interest investors, however, to know that the money is probably the least significant aspect of this deal to General Dynamics.

From Lima with tanks

To understand why, you need to travel back nearly a decade, to 2016.

Despite more than a decade of helping America fight a "Global War on Terror," General Dynamics' marquee Combat Systems division -- responsible for building armored vehicles -- was struggling. With no peer opponents for America to fight, and plenty of tanks already built during the Cold War, there simply wasn't much need to build new tanks. Year after year, a lack of new orders forced General Dynamics to contemplate mothballing its last remaining operational tank-building factory, in Lima, Ohio.

And no wonder. Combat Systems' revenues had been declining for seven straight years. S&P Global Market Intelligence data show that from 2009 to 2016, Combat Systems revenues shrank nearly 43%, to just $5.5 billion. The good news was that despite the dearth of work, the Combat Systems business remained profitable; the bad news was that it was clearly a business in decline.

It wasn't until 2017 that revenues, bolstered by massive new orders for hundreds of M1A2 Abrams main battle tanks for the armies of Kuwait and Saudi Arabia, began growing again. Subsequent orders from Taiwan in 2019 and from the U.S. Army in 2022 have since added to the momentum, lifting General Dynamics Combat Systems revenue to $8.3 billion last year -- a level last seen nearly 15 years ago.

And now the division is set to win new work worth roughly 26.5% of the revenue it booked in all of last year. That will certainly keep the momentum going, and help General Dynamics to justify keeping its Lima plant operational for additional years into the future.

Grand news for investors

It won't be half bad for profits, either.

Revenue of $8.3 billion only makes Combat Systems General Dynamics' fourth-biggest business unit (out of four units total) by revenue, you see. But with a 13.9% operating profit margin, it's actually the company's most profitable division per revenue dollar. Put another way, for every $1 worth of revenue General Dynamics takes in from selling armored vehicles, it makes more pennies in profit than it would earn selling an equivalent dollar's-worth of military warships, cybersecurity equipment, or Gulfstream jets.

Turns out, General Dynamics isn't just most famous for building Abrams main battle tanks. It's also most profitable when churning out those tanks. So while we may scratch our heads in confusion, wondering why Bahrain is so keen on buying them, General Dynamics investors should just count their lucky stars that General Dynamics will get to keep selling them.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends BAE Systems, Lockheed Martin, and RTX. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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