With a military conflict in Afghanistan and a defense-minded Republican in the White House, a rise in defense spending was predictable. Indeed, the 2002 defense budget passed in mid-December jumped 11%, to $343 billion. But the haunting question for weapons makers is: How long will the largesse last?
Blurring the picture, much of the increase is slated for health care, pay, fuel, and rebuilding of an aging infrastructure--not weapons. Still, weapons makers will see some new cash. While spending on military aircraft was flat in 2001, next year it's expected to rise 10%, to $36.9 billion, according to the Aerospace Industries Assn. Boeing Co.'s C-17 transport plane and its Super Hornet fighter, as well as Lockheed Martin Corp.'s F-22 Raptor fighter, could be big beneficiaries. And with the White House pushing missile defense and smart weapons, spending on missiles, which rose 14% in 2001, could climb 20%, to $12.9 billion, predicts the AIA.
On the other hand, the total for research, development, and procurement for 2002 edged up to just $108 billion, a 4.85% rise--and procurement, where the industry earns the most profit, will be flat at roughly $62 billion. The big bucks are likely to flow to companies making smart weapons, sensors, and unmanned vehicles--technologies dominated by Raytheon (RTN
), Northrop Grumman (NOC
), Lockheed Martin (LMT
), and Boeing (BA
). More money could come from the September 11 emergency-spending measure, though the amount isn't certain. Much of the antiterrorism funding will go to intelligence, however, not traditional arms.
Even this modest party may be short-lived. "I expect this to be a one-year blip," says Jon B. Kutler, chairman and CEO of Quarterdeck Investment Partners, an investment bank that specializes in the aerospace industry. Robert Friedman, a defense analyst at Standard & Poor's, adds that once the war on terrorism cools down, Social Security and Medicare will be on the front burner again. The guns vs. geezers debate will keep a lid on "outsized increases in the defense budget," he says. In fact, for 2003, the Pentagon may be lucky to get a 3% boost.
By Stan Crock
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Copyright 2002, Bloomberg L.P.
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