Grumman Wins Jet Fighter Contract, Then Sees Stock Bomb : Wall Street: Shares price is lowest since early ‘80s. Management is optimistic but investors are wary of defense companies in general, Grumman in particular.
A company that recently won congressional approval to build 18 jet fighters for at least $50 million per plane could be expected to be popular among Wall Street investors, right?
In the case of Grumman Corp., wrong.
The Bethpage, N.Y., company’s stock is trading at its lowest level since the early ‘80s, despite the decision wrung out of Congress two months ago to finance 18 new F-14Ds. Shares dipped from 22 last summer to below 15 in mid-December, lowest since March, 1982. Grumman has since dropped even further, closing Wednesday at 13 3/8 after a one-day loss of 12 1/2 cents on the New York Stock Exchange.
Grumman officials say they aren’t alarmed by the depressed stock price. The decline, they say, is related more to reductions and shifts in U.S. military spending than to any problem at the company itself. They point out that the stocks of other major military contractors are performing similarly.
Analysts agree that events beyond the control of defense companies are affecting stock prices. Reduced East-West tensions, due in part to the democratic reform movement in Eastern Europe, prompted the Bush Administration to indicate it would restrain defense spending.
But Wolfgang Demisch, director of research for UBS Corp. of New York, said Wall Street’s dim view of defense stocks actually began early in 1989, when investors took note that defense budgets had been stagnant since the Reagan military buildup peaked in the mid-1980s.
“They were all seriously impacted, and Grumman was just among the numerous ones that got tagged,” Demisch said.
Even a rally like Tuesday’s is unlikely to change Wall Street’s long-term attitude. “These (defense) stocks move to the beat of a different drummer, and that drummer seems to be in retreat,” said Howard Rubel, an analyst for C.J. Lawrence, Morgan Grenfell Inc.
Because of the depressed prices, one prominent Wall Street analyst, Paul Nisbet of Prudential-Bache Securities, placed Grumman and some other defense companies on a list of stocks he recommends that investors buy, saying such stocks are undervalued. But Nisbet’s view is in a distinct minority, as even Prudential-Bache distanced itself from his recommendations.
A decline in a company’s stock is important to more than investors. The price of a stock is crucial if a company decides to sell more shares as a means of raising cash. Grumman spokesman Robert Harwood said the company has no current plans to sell more stock; Grumman has about 33 million shares of common stock outstanding.
But analysts note that some defense companies may need more cash in the years ahead, to finance nondefense programs as the Pentagon cuts back on military spending.
Grumman Chairman John O’Brien, in a recent interview broadcast to the financial community on the Institutional Research Network, described the drop in the company’s stock as a “gross overreaction.” He traced it back much further than the East-West thaw, saying the stock has been low since late 1987, when Grumman lost a competition to build the Navy’s next-generation attack aircraft.
O’Brien said analysts had used that loss to conclude that “we were going to get out of the aircraft business in five years.” This, he said, “set a low starting point for our stock, driven even further by the current news.”
Grumman’s position is far better than Wall Street believes, O’Brien said in the television interview. He noted that in addition to the $1.2-billion contract to build the F-14Ds, the company has $6.7 billion in booked orders, a contract to begin upgrading six existing F-14s, and still other lucrative space, electronics and truck-building work.
Nisbet, the Prudential-Bache analyst, agreed that Grumman’s outlook is good. He added the stock to his buy list, saying there is “a better than 50-50 chance that the F-14 production line will remain open through the end of the century. This opens up the opportunity for Grumman to compete for the next-generation Navy fighter aircraft for the 21st Century.”
Nisbet also recommended that investors buy the stocks of General Dynamics, McDonnell Douglas and other defense contractors. He said the market had overreacted and that Soviet President Mikhail S. Gorbachev’s policies of glasnost and perestroika are “unlikely to be around by the time proposed (U.S.) defense cuts are to be legislated.” Prudential-Bache included a disclaimer in Nisbet’s report “since his opinions conflict with those of some others in the firm.”
Market analysts at other major investment companies, including George Shapiro of Salomon Brothers, disagree with Nisbet’s view of Grumman stock.
“I would stay away from Grumman stock,” Shapiro said. “I don’t see how clients are going to make much money in it. I don’t think the F-14 is going to get resurrected (after the 18 planes are built). They fought the battle in the ’90 budget and they won, and that’s it.”
