New Growth, Role for Defense in a Changing World
In recent weeks, while most investors seemed focused on election news or worries about technology stocks, shares of leading aerospace-defense companies hit new highs.
The underlying reasons weren’t hard to find. Defense budgets are slated to rise in the decade ahead as a changing world presents new challenges to U.S. military strategy. A major review of defense policies is a certainty in the next few years.
Meanwhile, defense contractors are seeing new Pentagon spending to renew and replenish programs for fighter planes, air and sea transport carriers and other weaponry. “They’re seeing new cash for the first time in 10 or 12 years,” says veteran analyst Paul Nisbet, of JSA Research, a Providence, R.I., firm.
The outgoing Clinton administration has budget projections for weapons programs rising from $60 billion to $71 billion by 2005. And whoever forms the next administration is not expected to reduce such planned expenditure.
Little wonder that Lockheed Martin, Boeing, General Dynamics, Newport News Shipbuilding, Litton Industries, Alliant Techsystems and L-3 Communications have all hit new highs lately.
And a broader, more international defense business is thriving. Wall Street analysts now pay attention to global suppliers of military technology, such as Britain’s BAE Systems, French-German-Spanish firm EADS and Singapore’s ST Engineering.
The world role of military industries is more complex than it used to be. Indeed, in the coming decade, the defense business will respond to shifting strategic imperatives for the United States and other countries.
A forceful reminder of that can be seen today on the Korean peninsula, where North and South Korea are increasing contacts for the first time since the Korean War began in 1950. The new era of Korean relations will affect the 37,000 U.S. troops stationed in South Korea.
“There is rising anti-Americanism on the Korean peninsula today,” Professor Chae-Jin Lee, head of a strategic studies institute at Claremont Colleges, told a Pacific Council forum on Korea last week in Los Angeles. As Seoul increases its “constructive engagement” with Pyongyang, Lee said, questions will arise about a U.S. military force remaining in Korea to “contain” the North and defend the South.
All of Asia is changing dramatically. China, India and Pakistan are building up armaments. Several months ago, Japan had to protest to China after Chinese warships sailed into Japanese waters.
Meanwhile, Taiwan is preparing to reopen commercial shipping links with China after a 51-year ban.
Russia and all of Europe, the Middle East and Latin America are undergoing historic changes. So ideas about defense also must change.
Military experts in Washington acknowledge that U.S. policies, still geared to U.S. forces based in Europe and prepared to fight the Soviet Union, are overdue for renewal. High-level debates about new directions have begun.
Eliot Cohen, professor of strategic studies at Johns Hopkins University’s School of Advanced International Studies in Washington, suggests a four-pronged role for the U.S. military: a missile defense system to defend the U.S.; conventional forces capable of fighting a war over long distances and time periods; a special force for local wars and skirmishes; and a separate force for peacekeeping.
But hashing out new defense policies will take the four years of the next president’s term and then some.
Meanwhile, defense industry needs will be met by spending on “the broad product lines” that today’s defense industry possesses, says analyst Pierre Chao of Credit Suisse First Boston.
More than 300 F-22 Stealth fighter planes will be bought for the Air Force from Lockheed Martin and Boeing. More than 500 upgraded F/A-18 E & F fighters will be bought for the Navy, also from Boeing, which became a major military and space contractor three years ago with the acquisitions of McDonnell Douglas and the defense business of Rockwell International.
Intelligence-gathering attack submarines will be ordered from General Dynamics and Newport News. An enlarged long-range bomber force, based on Northrop Grumman’s B-2 Stealth bomber, may be developed.
A new armored vehicle, lighter weight and more maneuverable than a tank, is being ordered for the Army from General Dynamics and General Motors.
There will be constant spending on the high-tech tools of modern warfare, the electronics systems and microprocessor guided weapons of Raytheon, Litton, Alliant Techsystems and BAE.
There will be increased demand for the secret reconnaissance and surveillance technology of TRW and Northrop--which is developing an unmanned high-altitude reconnaissance aircraft called Global Hawk.
Behind general agreement in the White House and Congress that $70 billion to $100 billion should be added to defense spending in the coming decade lies a sense that military spending has lagged in the years since the Persian Gulf War.
And a sense that the nation’s military hardware has become threadbare after repeated use in small wars such as Kosovo and constant use in training.
“The air fleet is worn and needs renewal,” says defense expert Loren Thompson of Lexington Institute, an Arlington, Va., research firm. “The U.S. can’t be the world leader unless it invests.”
But larger defense budgets will be debated. Already, Business Leaders for Sensible Priorities, an organization of 600 business people such as Ted Turner of Time Warner and Alan Hassenfeld of Hasbro toys, is calling for defense spending to be diverted to education and health care.
The organization commissioned a study by former Asst. Secretary of Defense Lawrence Korb that says the Pentagon could cut spending 20% by going slower with purchases of new planes and submarines while older models are still the most advanced in the world. Savings would be $62 billion in the current fiscal year, says Korb, who served in the Reagan administration.
Still, financial markets are convinced spending is going up. For that and other reasons in a changing world, defense will be a business to watch in the coming decade.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Stronger Defense
Almost all defense stocks have hit new highs in recent weeks, mainly because Defense Department expenditures on weapons are rising for the first time in a decade. Listed are major defense contractors and specialized suppliers, stock prices and current price-to-earnings ratios (on estimated 2000 earnings).
*--*
Ticker 52-week 52-week Friday P/E Company symbol high low close ratio Alliant Techsystems ATK 98.50 51.00 98.50 15.0 Boeing BA 67.88 32.00 65.38 25.0 General Dynamics GD 73.69 36.25 73.13 18.6 Litton Industries LIT 60.25 26.81 59.88 13.0 L-3 Communications LLL 70.94 35.69 66.13 31.0 Lockheed Martin LMT 37.58 16.50 33.59 26.0 Newport News NNS 52.13 24.75 51.81 19.0 Shipbuilding Northrop Grumman NOC 93.88 42.63 77.94 9.0 Raytheon RTN/B 35.38 17.50 34.00 34.0 TRW TRW 65.00 34.44 34.44 7.5
*--*
Source: Bloomberg News
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Rising Force
Defense budgets will rise through this decade, according to federal projections. That is the big factor driving up defense stock prices. Projected Defense Department outlays:
*--*
Fiscal year* Defense expenditure (in billions) 2001 $279 2002 285 2003 294 2004 303 2005 317 2006 318 2007 322 2008 332 2009 341 2010 349
*--*
*Oct. 1-Sept. 30
Source: U.S. government budget *
James Flanigan can be reached at jim.flanigan@latimes.com. An archive of his recent columns can be found online at https://www.latimes.com/flanigan.
