Defense Sector Under the Gun : Aerospace: Stocks dip for Northrop, with B-2 funding in doubt, and many other contractors. McDonnell Douglas, however, edged up on the strength of its cargo jet.
Taking their first hard look at the post-Cold War battle plan sketched out by President Bush, investors decided Monday that the news for the aerospace industry was mostly bad while defense industry executives chose to emphasize the positive amid the talk of cuts.
With the exception of McDonnell Douglas--boosted by recent flight successes of its C-17 cargo jet--most major defense contractors saw their stock prices suffer on Monday.
President Bush proposed sharp cutbacks in nuclear weapons programs, a step-down in the alert status of bomber groups and other defense elements and the scrapping of such delivery systems as the MX rail-garrison and the short-range nuclear attack missile.
Northrop Corp., off $1 Friday in anticipation of the President’s Friday night speech, lost 25 cents Monday amid worsening doubts that the company’s crucial B-2 Stealth bomber program can survive in Congress.
Statements Sunday by Sen. Sam Nunn (D-Ga.) fueled speculation that the Senate’s slim support for the B-2 would erode during conference committee talks with the House, which earlier voted to suspend the program. Nunn, long a B-2 backer, said that perhaps no more than half of the 75 bombers originally planned may now be needed.
“It’s becoming increasingly likely that the B-2 program will be terminated,” analyst Lawrence M. Harris of Kemper Securities said Monday.
On the other hand, Kent Kresa, chairman of Los Angeles-based Northrop, chose to focus on the support that Bush gave the bomber in his speech rather than on Nunn’s remarks.
“The important thing,” Kresa said in an interview Monday, “is the reaffirmation of the importance of the B-2 by the President.”
He cited Bush’s request for funds for four more B-2s under the fiscal 1992 budget and seven more the following year. Whether the total number to be built in the program will reach the planned 75 “is another matter--and is well downstream from here,” Kresa said.
Analyst Paul H. Nisbet of Prudential Securities in New York agreed that Bush’s support was key. Nisbet argued that the President could save the program’s funding at least for fiscal 1992 by threatening the use of his veto power to an appropriations package that slashed the B-2 program.
Nisbet noted that Northrop’s stock was as high as $31.25 at the time of the Soviet coup attempt in August. It has since dropped 34%, closing at $23.25 in New York Stock Exchange trading Monday.
Harris said it is impossible to overstate the importance of the B-2 to Northrop’s future, because--at $865 million per plane--it accounts for more than half of the company’s sales and 45% of its operating profit. The B-2 also employs 12,500 people at Northrop. Including subcontractors and indirect jobs, the program employs 35,000 in California, a Northrop spokesman said.
The Wall Street brokerage Wertheim Schroder downgraded Northrop’s stock Monday, judging it likely to under-perform the market.
“Rightly or wrongly, the B-2 has become a more or less symbolic target for defense budget cutters,” Wertheim analyst Jerry Cantwell said. It may be a long time before a final decision is made on the program, he added; in the meantime, the uncertainty will cause Northrop’s stock to lag.
At the same time, Wertheim is bullish on McDonnell Douglas, giving its stock a “buy” rating based largely on the recent successful test flights of its C-17 military transport, which is built in Long Beach by McDonnell’s Douglas Aircraft unit.
McDonnell stock jumped $2.75 Monday, hitting a new high for the year of $64.625 and continuing a run that has taken the stock up $7.50 in the last week.
After months of unfavorable publicity about cost overruns and project cancellations, the company and the C-17 program have been favorably profiled in Aviation Week and the New York Times--reviews that analysts said account for part of the stock run-up.
McDonnell also has been a target lately of short-sellers, who hope to profit by selling borrowed stock and replacing it later after the price has fallen. The short-sellers--who have doubts about the company’s prospects--have been betting heavily that McDonnell’s stock would tumble.
Defense Issues Mixed The C-17 helped boost McDonnell Douglas’ stock.
Monday’s Change Company Close From Friday General Dynamics $46.375 +0.125 Hughes Aircraft 18.125 Unchanged Lockheed 39.875 -1.125 Loral 37.625 -1.00 McDonnell Douglas 64.625 +2.75 Northrop 23.25 -0.25 Rockwell International 26.50 -0.125 TRW 40.75 -1.125
