Detroit Automakers Turn Back the Clock on the Arsenal of Democracy -- Investors Should Cheer

Detroit automakers Ford Motor Company (NYSE: F) and General Motors (NYSE: GM) are fighting a new kind of war: one against the narrative that automakers are low-margin and capital-intensive. The automakers are doing this by entering new businesses, such as Ford with its battery energy storage systems and General Motors with its high-margin subscription services for OnStar and Super Cruise.

Both are also turning back the clock and getting back into the defense business to support the U.S. military. GM's first delivery of Patriot missile parts to Lockheed Martin is the most recent example of its growing value to investors.

History 101

It's a little buried in Ford's and General Motors' histories, but many forget that during World War II, both Detroit icons halted civilian car production to manufacture a long list of weaponry, vehicles, and aircraft. General Motors converted more than 100 plants and factories to build everything from airplane engines to machine guns and tank components. Ford similarly used its massive production capacity to deliver thousands of jeeps, heavy-duty military trucks, and even complete B-24 Liberator bombers to the military.

Thankfully, the situation today is far less dire, but there is an opportunity for both Ford and GM to create value for investors by dipping their toes back into the defense business. While many investors overlooked the development, General Motors resurrected GM Defense as a dedicated subsidiary back in 2017 and already builds lightweight infantry squad vehicles (ISVs) for the U.S. Army, based on the Chevrolet Colorado pickup.

Image source: General Motors.

Adding missile parts production

The first thing that might catch investors' attention is the sheer speed with which General Motors reacted to demand in the defense business. Less than a month after forming a partnership, General Motors delivered its first Patriot missile parts to Lockheed Martin. More specifically, GM delivered castings that make up the outer shell of the PAC-3 missiles, and in only 22 days after the ink on its Lockheed partnership dried.

Not only was that reaction speed impressive, but it could be a signal of more to come as President Donald Trump invoked the War Powers Act to encourage defense contractors, as well as other industrial juggernauts such as Ford and GM, to help feed the shrinking supply of missiles and munitions as the conflict in Iran continues to drag on, as well as supplying Ukraine in its conflict with Russia.

These developments are certainly on a far smaller scale than during the era of being the Arsenal of Democracy, but this is incremental business, and both Detroit automakers are pushing for more.

Does this make GM and Ford good investments?

The question for investors: At this smaller scale, how much could this boost Ford and GM's bottom lines? General Motors has a head start, albeit still in the early stages of building its revived defense business. Still, it's already expected to generate nearly $700 million in revenue this year and is on pace to generate EBIT profits despite early investment costs.

General Motors also expects a compound annual growth rate (CAGR) of more than 30% for GM Defense over the next several years, with operating margins targeted at 12% to 15%, a vast improvement over the lower-single-digit margins often seen across the traditional automotive industry.

For investors, this is certainly something to cheer, but not necessarily because it's going to instantly boost revenue and earnings to a new level -- it's not, when you consider GM is estimating its annual revenue will top $185 billion in 2026.

That said, this is but the latest step and development showing these age-old automakers can learn new and relearn old tricks. These tricks are coming with higher margins and slowly changing the narrative that automakers are forever low-margin companies. That is a big win, and savvy investors should keep an eye on valuations going forward to see whether Wall Street rewards thinking-outside-the-box strategies.

Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool has positions in and recommends Lockheed Martin. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.