Defense Companies Poised For Growth Under Bush

Tuesday, February 20, 2001
Despite the uncertainty of new government policy, the defense industry presents a picture of renewed growth, boosted by higher spending and technology funding under the George W. Bush administration. Makers of the nation's warfare technologies along with Wall Street analysts and industry consultants spent a week bragging about new opportunities and the likelihood of changes to Pentagon policy that would foster growth after 15 years of strained budgets. What's more, defense and aerospace stocks ended on a high note, climbing amid a broad market slump as 24 U.S. and British warplanes struck Iraqi military targets using various long-range, precision-guided weapons. "We are at a very important juncture in the history of defense reform," said Darleen Druyun, principal deputy assistant secretary of the Air Force and a top acquisition official for the Department of Defense. "We face a future that will be shaped by a new administration that will go after the tough issues to forge the more productive acquisition processes," she said this week at a conference on defense reform in Washington, D.C. Between that forum, sponsored by the American Institute of Aeronautics and Astronautics, and SG Cowen's annual aerospace conference in New York, industry executives presented a bright view of revenue growth over the next few years. And while many of their hopes are pinned to changes in funding and procurement policy, the contractors said the long-term shift they argue for is more likely under the new presidential administration. Shares of leading defense and aerospace stocks closed the week higher, with the Standard & Poor's aerospace index at 1,327.92, up 0.42 percent on the day and 4 percent for the week. Meanwhile, the broader market slumped. The widely watched S&P 500 index lost 1.89 percent to close Friday at 1,301.53 and the Nasdaq composite index dropped to its lowest close in almost six weeks. The aerospace and defense gauge has outperformed the S&P 500 by 78 percent in the last year. Since February 2000, the S&P aerospace index has gained 66 percent while the S&P 500 fell 1.7 percent. Lockheed Martin Corp., the nation's largest defense contractor and maker of the F-16 jet fighter, hit a new year high of $37.65 on Wednesday, its highest point since September 1999. It ended the week at $36.25, up from a year low of $16.50. Northrop Grumman Corp. closed at $90, near a year high of $93.88 and up from a low of $42.63, as two Wall Street firms gave the stock bullish ratings. On Friday, SG Cowen's Cai Von Rumohr named Northrop, maker of the B-2 bomber, as his top pick in the group. That followed an upgrade from Salomon Smith Barney on Thursday to a "buy" rating from an "outperform." Both firms cited the possible upside from Northrop's proposed acquisition of shipbuilder Litton Industries Inc. Investors have largely discounted a boost to government spending on defense, raising the industry's share prices in anticipation, analysts said. They note, however, that stocks could retreat if the Department of Defense cannot strike an accord with Congress on new policy. Bush has promised a top-to-bottom review of spending priorities. But apart from an extra $1.4 billion for a military pay raise, the White House said it has no current plans to raise defense spending beyond the $310 billion proposed by former President Bill Clinton in 2002. From fiscal 2002 to 2006, Bush pledged to raise spending on military research and development by $20 billion. Some on Capitol Hill and the military Joint Chiefs of Staff are already pressing for $8 billion more in the current year for normal worldwide operations and maintenance of aging weapons. But overall, the Pentagon said decisions on funding billions of dollars in new equipment must await completion of a wide review by the administration. That has left the contractor community's chief executives lobbying for multiyear funding, research and development money, export reform and incentives to cut costs. "We've all come through a difficult passage," said Daniel Burnham, chief executive at Raytheon Co., noting the steady decline in defense spending since 1985 and nearly a decade of consolidation. "There is no question we are on the way back. There is no question we have a lot of work to do," he said in Washington. "There is consensus on the need to act after 15 years of talking."
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