Defense Stocks Rise on Expectation of Buildup
Anticipating a large military buildup in response to last week’s terrorist attacks, investors snatched stocks of defense contractors Monday, leading to one of the only upsides to a generally dismal day on Wall Street.
Military electronics and weapons makers such as Raytheon Co., Lockheed Martin Corp. and Los Angeles-based Northrop Grumman Corp. surged with some stocks climbing nearly 30%.
But much of the gains came at the expense of Boeing Co. and other commercial aircraft makers and suppliers that got hammered as investors feared a drop in airliner orders from a slump in air travel. Chicago-based Boeing fell nearly 18% to $35.80 on the New York Stock Exchange, a 52-week low. Similarly, United Technologies Corp., maker of Pratt & Whitney jet engines, declined 16% after issuing a warning fourth-quarter earnings will come in “well below” estimates.
Analysts said buyers of defense stocks were reacting to expectations of an increase in military spending after Congress last week approved a $40-billion emergency aid package, half of which would go to military operations. The White House said the funding was a down payment on a long-term sustained military campaign.
Whether the increase in defense spending becomes a large-scale economic force in the nation’s defense manufacturing centers, particularly Southern California with its 120,000 workers, remains unclear. But investors appeared to be signaling Monday their belief the industry is headed for something greater than a sales blip.
“The ramp-up on defense stocks was somewhat reflexive,” said David Speiser, who leads an aerospace and defense practice at McKinsey & Co., a management consulting firm. “No one knows exactly what the appropriate response is or what the weapons of choice will be.”
Investors are not likely to get much help from the Pentagon, which Monday signaled any discussion about military planning and strategy will be closely held--much more so than in the past--and the public may not know what weapons will play a role until they’ve already been deployed.
Defense contractors avoided all questions about any programs that might be getting special attention from the Pentagon though military sources said some companies were contacted within days of the terrorist attacks about the possibility of ramping up certain weapons production.
“I think we have just turned a page in our history about how open we will be with information,” Navy Rear Adm. Craig Quigley, a Pentagon spokesman, said.
Raytheon, maker of the Tomahawk cruise missile and electronic surveillance equipment, surged nearly 27% to $31.50 a share on the NYSE as analysts said the company would most benefit from the kind of military operations expected in the fight against terrorist cells.
Other traditional names in defense posted substantial gains as well. Shares of Northrop, maker of the B-2 stealth bomber, rose 16% to $94.80, and Lockheed, the nation’s largest defense contractor, climbed 15% to $43.95, both on the NYSE.
On the other hand, Boeing, the nation’s second-largest defense contractor whose military and satellite businesses generate 40% of its revenue, could not buttress investors’ concerns about a potential slump in commercial aircraft orders.
Defense analysts said they didn’t expect a sudden jump in weapons production but a gradual increase in specific programs as the White House redefines the nation’s military strategy and priorities.
Loren Thompson, an analyst with Arlington, Va.-based defense policy think tank Lexington Institute, said the Pentagon’s most immediate hardware requirements are likely to be classified intelligence and reconnaissance equipment.
Non-classified programs that could get particular attention include unmanned aerial vehicles such as Northrop’s Global Hawk, a high-altitude long-endurance spy plane slated to replace the U-2, and San Diego-based General Atomic Aeronautical System’s Predator. That plane has been in use in Kosovo helping ground troops with reconnaissance. The planes, also known as UAVs, are controlled remotely or by a pre-programmed computer on board. Global Hawk and Predator were designed and developed in San Diego.
Locally, shares of Microsemi Corp., which relies heavily on sales to the military and aerospace industries, rose 14%, gaining $3.13 to close at $26.03 on Nasdaq. The Irvine maker of power-regulating semiconductors gets nearly 36% of its revenue from sales to the military and aerospace industries, where it counts Raytheon, General Electric Co., Lockheed Martin and Boeing among its customers.
Microsemi’s components go on nearly all weapons the military uses, from tanks to missiles, and Wall Street analysts know its markets well, said David R. Sonksen, the company’s chief financial officer. It also makes components for jet cockpits, wing electronics, motor control, radar and communications.
Ceradyne Inc., a Costa Mesa maker of lightweight ceramic armor for military uses, saw its stock leap 28% with a gain of $1.80 a share to close at $8.25 on Nasdaq.
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Times staff writer James S. Granelli contributed to this report.
