Defense stocks often attract investor attention when military spending rises, geopolitical tensions escalate or governments announce major procurement programs. The logic appears straightforward: if countries are spending more on defense, companies producing aircraft, missiles, radar systems, ships or military electronics should benefit.
Reality is considerably more complicated.
According to the Stockholm International Peace Research Institute (SIPRI), global military expenditure reached approximately $2.89 trillion in 2025, rising for the eleventh consecutive year. Compared with 2016, worldwide military spending was 41% higher in real terms.
But a larger defense budget does not automatically translate into immediate revenue or higher profits for every contractor. For investors analyzing defense stocks, headline spending numbers should therefore be the beginning of the research process rather than the conclusion.
Revenue mix, backlog quality, procurement cycles, contract structures, margins, international exposure and dependence on individual programs can matter just as much as the overall direction of government military budgets.
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Defense Stocks Are Not All Exposed to the Same Market
The first mistake investors can make is treating the defense industry as one homogeneous sector.
Some companies derive most of their revenue directly from government defense contracts. Others combine military operations with commercial aviation, space, cybersecurity or business aviation. Two companies commonly described as defense contractors can therefore react very differently to the same economic or geopolitical development.
Lockheed Martin provides an example of a company with particularly high government exposure. According to its 2025 Form 10-K filed with the SEC, 72% of its $75 billion in sales came from the U.S. government in 2025, including 63% connected to the U.S. Department of Defense. Another 28% of sales were associated with international customers.
RTX presents a different structure. Its portfolio combines Raytheon’s defense operations with Collins Aerospace and Pratt & Whitney, which have substantial exposure to commercial aviation. According to the company’s 2025 annual report, RTX ended the year with approximately $268 billion in backlog, consisting of $161 billion in commercial backlog and $107 billion in defense backlog.
That distinction matters. An investor buying a diversified aerospace and defense company may also be taking exposure to airline traffic, aircraft production cycles and demand for commercial aircraft maintenance. A company concentrated primarily on missiles, submarines or military electronics may instead depend much more heavily on government procurement.
When comparing defense stocks, the first question should therefore be simple: where does the company actually make its money?
Backlog Can Matter More Than a Budget Announcement
Defense companies frequently operate under contracts extending across several years. As a result, one of the most useful indicators in the sector is backlog: business that has already been contracted but has not yet been fully recognized as revenue.
A large backlog can give investors unusual visibility into future sales. But not every dollar of reported backlog has the same quality.
Lockheed Martin reported $193.6 billion of backlog at the end of 2025, compared with $176 billion one year earlier. According to its SEC filing, the company expected approximately 37% of that amount to become revenue during the following 12 months and around 60% within 24 months.
There is another important detail. Of the $193.6 billion backlog, $120.2 billion was classified as funded. Lockheed defines funded backlog as firm orders for which customer funding has already been authorized and appropriated. Unfunded backlog consists of firm orders for which funding has not yet been appropriated.
That distinction is important for investors.
General Dynamics illustrates the issue from another angle. Its 2025 annual report showed $118 billion in backlog at the end of 2025, but total estimated contract value was substantially higher at $178.9 billion.
The difference included potential future business such as unexercised contract options and estimated future work under indefinite-delivery, indefinite-quantity agreements. Those amounts may eventually turn into firm orders, but they are not equivalent to existing backlog.
For investors researching defense stocks, backlog analysis should therefore go beyond asking which company reports the biggest number. The more important questions are how much of the backlog is funded, when it is expected to convert into revenue and how much consists of firm contracts rather than potential future orders.
Book-to-Bill Shows Whether the Order Book Is Expanding
Backlog is particularly useful when combined with the book-to-bill ratio.
Book-to-bill compares new orders booked during a period with revenue generated during that same period. A ratio above 1 generally indicates that a company is receiving orders faster than it is converting its existing order book into sales.
General Dynamics, for example, reported a company-wide book-to-bill ratio of 1.5 for 2025. In its defense businesses, the ratio reached 1.6, while defense backlog increased to $96.2 billion from $70.9 billion a year earlier, according to its regulatory filing.
That does not mean that a ratio above 1 is automatically bullish. A single multibillion-dollar ship, aircraft or weapons contract can significantly affect orders in one period.
Investors should therefore examine book-to-bill across several quarters or years and determine which programs are responsible for the change.
Government Budgets Move Faster Than Defense Revenue
One of the biggest differences between analyzing defense stocks and many consumer businesses is the length of the procurement cycle.
A government can announce plans to spend billions on defense long before contractors receive the money.
Major programs may have to pass through research and development, political approval, budget authorization, appropriations, procurement competitions, contract negotiations, testing and initial production before reaching full-scale manufacturing.
The process can take years.
The U.S. Government Accountability Office’s 2026 assessment of major weapon programs found that the average time required for major U.S. defense acquisition programs to deliver an initial capability had risen to more than 12 years. GAO also reported continuing schedule delays across a number of programs.
This produces one of the most important distinctions for investors: budget growth is not the same as revenue growth.
A government might approve additional military expenditure today, while the financial effect on a contractor may appear gradually over several years.
Companies with established production lines, funded contracts and sufficient manufacturing capacity may be positioned to turn growing demand into revenue faster than businesses whose potential growth depends on programs still in development.
Investors should therefore trace the entire chain: political commitment, budget approval, actual funding, contract award, production and finally revenue recognition.
Revenue Growth Does Not Automatically Mean Higher Margins
Rising defense demand sounds attractive. But the profitability of that demand depends heavily on the type of contracts a company signs.
Two major categories are fixed-price and cost-reimbursement contracts.
Under a fixed-price contract, a contractor generally agrees to perform the work for an established price. If labor, materials or engineering costs rise more than expected, the contractor may have to absorb part or all of the additional expense.
Cost-reimbursement contracts operate differently because eligible costs are generally reimbursed by the customer, usually alongside an agreed fee.
RTX explains the distinction in detail in its 2025 Form 10-K. The company notes that under firm fixed-price contracts it bears the burden of cost overruns, while unexpected technical problems, manufacturing challenges, shortages of materials or labor and inaccurate initial estimates can negatively affect profitability.
Development contracts can be particularly risky because neither the company nor its customer necessarily knows the final cost of solving complex technical problems.
This explains why investors should not analyze defense stocks solely through revenue growth.
Two contractors can both report rapidly increasing sales while producing completely different profit outcomes. Mature production programs with predictable manufacturing economics may generate attractive margins, while technically challenging development programs can create billions of dollars in revenue without delivering comparable profitability.
Segment operating margins therefore deserve close attention, as do changes in estimated contract profitability and charges related to individual programs.
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Production Capacity Can Become the Real Bottleneck
An enormous order book only creates shareholder value if the company can actually manufacture and deliver the products.
This has become increasingly relevant as governments seek to replenish inventories and expand production of missiles, ammunition, air-defense systems and other military equipment.
Manufacturing capacity cannot necessarily be expanded overnight. Defense supply chains depend on specialized factories, components, electronics, raw materials and skilled workers. Some products also have only a handful of qualified suppliers.
That means investors should compare growth in backlog with growth in physical production.
Capital expenditure is another useful clue. General Dynamics, for example, invested almost $1.2 billion in capital expenditure during 2025, up 27% year over year, as the company prepared for further growth, according to its full-year financial results.
For investors, strong demand combined with higher investment can signal future production growth. But it also means cash has to be spent before the additional capacity generates revenue.
That makes free cash flow particularly important. Accounting revenue on long-term contracts does not always move in parallel with cash generation.
A company may report excellent order growth but still struggle to translate that demand into cash if it needs substantial investment in factories, inventory or suppliers.
Export Exposure Is Both an Opportunity and a Risk
International sales can provide defense contractors with another source of growth beyond their domestic markets.
But selling weapons abroad is fundamentally different from exporting ordinary industrial products.
U.S. defense equipment can be sold through government-to-government Foreign Military Sales programs or through licensed Direct Commercial Sales. The U.S. Department of State’s overview of arms sales and defense trade explains that proposed transfers can require government review and, in some cases, congressional notification. Major systems may also take years to deliver after a sale has been approved.
For investors, international exposure therefore works in both directions.
Geographic diversification can reduce dependence on one government’s military budget and give a contractor exposure to rising defense spending among allied countries.
But international contracts introduce additional political and regulatory risks.
Lockheed Martin, for example, warns in its annual filing that international sales can be affected by foreign government budgets, sanctions, regulatory requirements, export rules and changes in foreign policy.
A high share of international revenue is therefore neither automatically positive nor automatically negative.
Investors should examine which countries are buying the company’s products, how politically sensitive those contracts are and whether sales depend on export licenses, local production agreements or technology transfers.
Geopolitics Matters, but Not in the Simplest Way
Geopolitical tension is one reason investors frequently become interested in defense stocks. But simply assuming that more conflict equals higher profits can lead to poor analysis.
Defense procurement operates over long periods. What matters most for companies is not necessarily one geopolitical event, but whether governments respond by changing long-term procurement priorities.
A country may increase its overall defense budget while shifting spending toward drones, air defense, missiles, electronic warfare, satellites or cybersecurity. Contractors without significant exposure to those areas might benefit much less than the headline budget increase suggests.
Even companies operating within the same category can have very different exposure.
One contractor may supply a mature missile that can quickly enter higher-rate production. Another may be developing a next-generation system that remains years away from meaningful revenue.
Investors therefore need to ask a more precise question than whether military expenditure is increasing: what capabilities are governments actually buying?
A Framework for Comparing Defense Stocks
Instead of building a list of “top defense stocks now,” investors can compare companies using a consistent analytical framework.
The first step is revenue mix. Determine how much revenue comes from defense, commercial markets, domestic governments and international customers. High government dependence may provide visibility, but it also creates exposure to changes in political priorities.
Next comes backlog. Investors should distinguish funded backlog from unfunded orders and from broader estimates of potential contract value. The expected timing of backlog conversion is also important.
Book-to-bill can then show whether new orders are replacing revenue that is currently being recognized.
Margins reveal whether revenue growth is actually profitable. Investors should pay particular attention to the mix between mature production contracts and technically difficult development contracts, especially where fixed-price structures transfer cost risks to the contractor.
Export exposure adds another dimension. International demand can broaden a company’s growth opportunities, but licenses, sanctions, foreign policy and local production requirements can complicate execution.
Finally, investors should compare backlog growth with production capacity, capital expenditure and free cash flow. Orders have limited value if manufacturing bottlenecks prevent a contractor from delivering them efficiently.
Valuation Comes After Business Analysis
Once the underlying business has been understood, investors can start comparing valuations.
Common indicators such as price-to-earnings ratios, enterprise value to EBITDA or free cash flow yields can help determine what expectations are already reflected in the share price.
But comparing valuation multiples without considering business quality can be misleading.
A defense contractor trading at a lower multiple may have slower backlog growth, weak cash conversion or exposure to contracts suffering significant cost overruns. A company with a higher multiple may have stronger margins, faster-growing production programs or more predictable long-term revenue.
Neither situation automatically makes one stock better than another.
The valuation question is ultimately about what an investor is paying relative to the company’s expected earnings, cash flows, risks and growth.
Defense Stocks Require More Than Following Military Spending
The backdrop for the industry remains significant. According to SIPRI’s latest global military expenditure data, countries worldwide spent $2.887 trillion on their militaries in 2025, with global expenditure rising 41% in real terms over the previous decade.
For defense stocks, however, that figure tells investors only how large the overall pool of spending has become.
The investment case for an individual contractor depends on where that money flows.
What does the company manufacture? Which governments buy it? How much business is already funded? How quickly can orders become revenue? What type of contracts has the company signed? Can factories handle higher production? And how much cash remains after the investment needed to fulfill those orders?
Answering those questions provides a much clearer picture than reacting to military budget announcements or geopolitical headlines.
Government spending can tell investors how much money may eventually enter the defense industry. Backlog, margins, procurement cycles, export exposure and production capacity reveal which companies may actually convert that spending into sustainable earnings and cash flow.
