Bush Speech Buoys Defense Stocks
Apparently, the best thing for defense stocks is a good political offensive.
Defense and aerospace stocks rallied Monday, recovering from last week’s sell-off, as Republican presidential nominee George W. Bush said he would raise military spending.
Speaking in Milwaukee to the national convention of the Veterans of Foreign Wars, Bush bemoaned shortages of parts and equipment and overall “declining readiness.”
“It’s now heading toward the fall [election] and the candidates are becoming more candid about their stance,” said Heidi Wood, a defense analyst with Morgan Stanley Dean Witter.
An earlier Bush speech at the Citadel, South Carolina’s military college, indicated the candidate might skip a generation of equipment spending to focus on research and development.
“That concerned everybody,” Wood said. “He’s now giving a more clear view on procurement, which has offset some of the concerns one might have had.”
The Standard & Poor’s aerospace and defense index gained 3.2%, outpacing the major indexes.
Boeing (ticker symbol: BA) gained $2.06 to $47.75, General Dynamics (GD) rose $1.38 to $62.06, Northrop Grumman (NOC) climbed 94 cents to $75, Newport News Shipbuilding (NNS) added $1 to $39.56 and Litton Industries (LIT) advanced $1.31 to $55.06.
Honeywell International (HON) gained $1.56 to $37 and United Technologies (UTX) rallied $2 to $63.50. Both are conglomerates with substantial aerospace divisions.
Many analysts expect defense spending to rise under whichever of the two major presidential candidates--Bush or Vice President Al Gore--wins, though Bush is viewed as the more positive for the military.
“As long as there’s a budget surplus, you’re likely to see growth in spending no matter who is in the White House,” said First Union Securities analyst Sam Pearlstein.
In recent polls taken in the wake of his nomination at the Democratic National Convention, Gore was found to be matching or slightly ahead of Bush.
In addition to an expected increase in defense spending, analysts said, wide-body aircraft demand is strong and the general aviation sector is humming, bolstering the aerospace and defense group’s prospects in several key areas.
Last week, Prudential Securities analyst Todd Ernst cut his overall rating on the aerospace and defense industry to “hold” from “accumulate.” In addition, an agreement by Boeing to buy a flight information business from Tribune (TRB), publisher of the Chicago Tribune and Los Angeles Times, for $1.5 billion triggered a decline in shares of the commercial aviation and defense giant.
Despite his downgrade, “a lot of investors feel the industry offers relatively stable earnings growth going forward,” Ernst said Monday.
Over the weekend, investors reconsidered the group and decided that “at the new prices it was a bargain,” said Paul Nisbet, a defense analyst with JSA Research.
Nisbet also said he believes a Republican White House and Congress in tandem would usher in greater defense spending.
“We expect that you’d see procurement going up to about $90 billion in three to four years,” from about $60 billion annually, Nisbet said.
The United States is “very much behind in replacing weaponry that has gone without replacement here for the last eight years,” Nisbet said. But even under the Democrats, “there is still tremendous pressure to speed up replacement of weapons,” he said.
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On the Offensive
Shares of defense and aerospace manufacturers rose broadly Monday as Republican presidential candidate George W. Bush said he would raise military funding.
Monthly closes of the Standard & Poor’s aerospace/defense index, and latest
Monday: 1,154.88, up 36.35
Source: Bloomberg News
