Meet ITT, the Defense Play


By Gene Marcial The September 11 terrorist attacks have changed the way the Street views ITT Industries (ITT). No longer simply a stodgy conglomerate that makes such products as pumps, valves, and fluid-measuring instruments, ITT is now considered an attractive and timely defense play.

And rightly so: 30% of its revenues are generated by its growing military defense systems, which include electronic surveillance equipment, tactical communications systems for ground forces, night-vision goggles and devices, and satellite instruments and mobile radar-control systems.

One of its electronic-warfare products is a self-protection system used on-board bombers, jet fighters, and helicopters that serves to protect these aircraft from missile attacks. ITT also makes backpack radios used by soldiers in the field.

HIGHER TARGETS. The company's shares have jumped from 42 on Sept. 10 to 50 on Nov. 5. The stock traded at around 30 a year ago. With the defense play in mind and the stock's advance, some analysts who had put a price target of 50 on it in early September have now raised their 12-month projection to at least 60.

With investors wanting to know more about the role of ITT's defense products in the company's growth, Chairman and CEO Louis Giuliano has told analysts that demand for this gear will continue to grow at an accelerated pace. He notes that backlog orders have hit a record $2.6 billion. Defense, he says, is one of ITT's long-cycle businesses that will help sustain its sales and earnings growth even during difficult economic environments.

"We expect the order backlog to grow due to the current focus on defense spending," observes John Balioti, an analyst at UBS Warburg, who rates the stock a strong buy. He estimates that over the past 12 months, ITT has booked defense contracts worth roughly $3.4 billion. This should provide the company with high single-digit revenue growth and improving margins over roughly the next six to seven years, he adds.

OFFSETTING WEAKNESS. Balioti figures defense sales in 2001 will reach a total of $1.28 billion. ITT's estimated total revenues in 2001 are $4.6 billion. The analyst says he expects the company to leverage its strong defense business and pumps operation, which accounts for 34% of sales, to offset the weakness in its connectors business (15% of revenues) and specialty products (21%). Other than the defense and pumps units, ITT's other operations haven't been up to snuff.

ITT Industries -- the legal successor to the old ITT Corp., which was split in 1995 into three publicly traded companies -- on Oct. 25 reported that third-quarter revenues from defense products and services rose 3%, to $321.3 million, from a year ago, while sales from connectors and switches declined 31%, to $148 million. Sales from pumps and complementary products dropped 2%, to $420 million. Specialty products sales rose 5%, to $235 million.

"ITT is doing a very good job of delivering high-quality results in a tough macro environment," argues Phua Young, an analyst at Merrill Lynch who expects the company to earn $3.10 a share in 2001 and $3.25 in 2002, up from 2000's $2.94. Consensus analysts estimates culled by First Call Corp. are $3.09 for 2001 and $3.35 for 2002.

OVEROPTIMISTIC? Young says the outlook for ITT's defense business remains very robust, based on requests for proposals. It would benefit directly, says Phua, from increased defense spending on surveillance, electronic-warfare, intelligence-gathering, and night-vision products. ITT's water- and wastewater-pump businesses also remain strong, with a bright outlook, he adds.

Is it possible that some analysts may be overstating the role of ITT's military products in boosting the company's sales and earnings growth? Probably not, since all indications are that defense spending will be up from here given the war on terrorists.

What if the defense play turns out to be of a shorter duration than now expected? Well, the positive answer is that at least ITT's military firepower helped the bottom line when it was needed most. Marcial is BusinessWeek's Inside Wall Street columnist


Race, Class, and the Future of Ferguson
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus