This rise in geopolitical tensions has prompted nations to reassess their defense strategies and spending.

As a result, countries across the globe are boosting their budgets to protect national interests and improve military readiness.

In 2024, global defense spending rose to $2.46 trillion from $2.24 trillion in 2023. The growth rate increased to 7.4%, compared to 6.5% in 2023 and 3.5% in 2022.

Consequently, defense spending reached 1.9% of global GDP in 2024, up from 1.6% in 2022 and 1.8% in 2023.

In the United States, one of the largest military spenders globally, the budget of the Department of Defense (DoD) has also seen consistent growth.

For its 2021 fiscal year, the DoD budget was approximately $700 billion. By 2025, that budget had grown significantly to eclipse $850 billion.

The rising costs of addressing ongoing conflicts around the world are a major driver of higher military budgets.

From Russia’s war in Ukraine to tensions with China in the Indo-Pacific region, geopolitical flashpoints are intensifying the need for military readiness and modernization.

Defense contractors positioned to support priority investment areas stand to benefit from this trend of growing defense budgets.

One such company is V2X (VVX), a global defense contractor.

Formed in 2022 through the merger of Vectrus and Vertex, V2X brings almost 80 combined years of experience supporting defense and government customers globally.

The company delivers services, software solutions, and training across air, land, sea, space, and cyber domains.

V2X’s focus on providing services, software, and training to military customers positions it well to gain from areas prioritized in defense budgets like logistics, cyber, and personnel support.

Specifically, the company provides logistics, maintenance, and infrastructure support for U.S. bases overseas. 

It also offers cybersecurity, AI/ML, and engineering solutions—core competencies directly aligned with DoD modernization initiatives.

Through its recruitment and training programs, V2X further aids priority personnel readiness efforts.

Given its strengths, the company appears well-suited to capitalize on defense budget allocations.

Its presence in over 20 countries, including a major Middle East footprint, also positions the company as a strategic partner amid evolving threats.

We can already see these factors in play with V2X achieving 47% Uniform return on assets ”ROA” and 95% asset growth last year.

Despite V2X’s strategic positioning and alignment with priority investment areas of the U.S. military, the market’s reception has been pessimistic.

We can see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform ROA will fall to 16%.

The market’s pessimistic view is caused by the dependency on fluctuating government defense budgets and contracts, which can be impacted by changes in political priorities and economic conditions.

The company does face some challenges. The Defense Department’s cost-cutting DOGE initiative aims to reduce spending, which could affect service providers. 

However, since the firm provides essential logistics and support services, it may be somewhat protected from major cuts.

With its considerable presence in the Middle East, V2X is not merely a beneficiary of increased U.S. military spending; it is a critical enabler of American strategic interests in a region that remains a focal point of global tensions.

The merger brings together complementary strengths, with Vertex’s technological and logistical capabilities merging with Vectrus’ regional expertise and operational experience.

This synergy positions V2X as a formidable player in the defense contracting arena, equipped to offer sophisticated solutions that address the multifaceted challenges of contemporary military operations.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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