| BUSINESSWEEK ONLINE : AUGUST 28, 2000 ISSUE | ||||||||
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| FINANCE
Why Defense Stocks Are Going Great Guns Investors figure spending will rise no matter who is elected Companies in the aerospace and defense industry may have trouble launching rockets. But that isn't stopping their stocks from heading into the stratosphere, leaving the broader market coughing in their plumes. The Standard & Poor's 500-stock index has edged up 7.3% since Mar. 1, but since their 52-week lows that month, Litton Industries (LIT) has rocketed 103%, Lockheed Martin (LMT) has soared 79%, Northrop Grumman (NOC) has risen 84%, and General Dynamics (GD) is up 73%. And the rebound may only be just beginning. The hawkish tone at the Republican convention suggests that a Bush-Cheney Administration would hike defense spending. And the Democrats won't be outdone. Vice-President Al Gore's selection of Senator Joseph I. Lieberman (D-Conn.) as his running mate puts the pro-defense wing of the Democratic Party clearly in the picture. Regardless of who wins, ''you're going to get an increase in defense spending on procurement,'' says Todd B. Ernst, an aerospace and defense analyst at Prudential Securities Inc. SPINNING AWAY. Even before the news about Cheney and Lieberman, defense stocks had been getting increased attention on Wall Street. Money is rushing back into defense as a ''defensive'' market play--in every sense of the word. For one thing, the market is rotating away from dot-coms. Interest-rate-sensitive companies hammered by the Federal Reserve's hikes don't look attractive. Investors need ''more secure places to park cash,'' says Jon B. Kutler, president of Quarterdeck Investment Partners Inc., an investment bank that specializes in aerospace and defense. But snubs of other investments aren't the whole explanation. The fundamentals of the aerospace and defense business are looking up. After focusing on deal-making for much of the 1990s, companies now are paying attention to the shop floor, and that's paying off with fewer of the unexpected write-offs and earnings disappointments that prompted investors to avoid the sector last year. General Dynamics, Boeing (BA), and Lockheed Martin all beat earnings expectations for the second quarter. Analysts especially like Litton Industries and Northrop Grumman, both trading at less than 11 times estimated 2001 earnings. On the commercial side, orders for Boeing Co.'s airplanes and General Dynamics Corp.'s Gulfstreams are unexpectedly strong. And after a prolonged decline sparked by the collapse of the Soviet Union, defense spending is growing. Expensive gear such as Raytheon Co.'s (RTN.B) early-warning radar for a national missile defense system will get ample funding. Congress and the Clinton Administration have agreed to authorize $60 billion of weapons procurements in fiscal 2001, up from $45 billion in 1998. Outlays should rise 5% to 6% in each of the next two years. That's hardly stellar growth by Internet standards, but far better than the industry's recent prospects. ''The market moves on relative changes,'' notes Pierre A. Chao, an aerospace analyst at Credit Suisse First Boston. ''Going from down to flat to growth--that's enough to move stocks.'' Smaller trends are favorable, too. The Defense Dept. has decided to speed up payments to contractors and is mulling increasing the rate of payments on work in progress. Both moves would cut borrowing costs for arms makers and bolster their bottom lines. Pentagon officials also are looking at ways to let companies keep more of the savings when they close plants. Now the Pentagon pockets most of it. Of course, not everything is rosy. As European companies consolidate, they're creating formidable competitors. But so long as the political winds blow in its direction, the industry is likely to remain in orbit. By Stan Crock in Washington _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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