Earnings Reflect Hike in Defense Spending
Stocks of aerospace companies rebounded Wednesday as two of the nation’s top defense contractors, bolstered by a sharp uptick in Pentagon spending, reported better-than-expected third-quarter earnings and predicted continued growth next year.
Although Boeing Co.’s net income fell 31% from a year earlier, mainly because of a charge related to the shutdown of production of its 757 commercial jets, profit from its defense business helped the company beat Wall Street projections.
The defense business also strengthened earnings for Northrop Grumman Corp. as the Century City-based company swung to a third-quarter profit of $184 million, or $1 a share, contrasted with a loss of $59 million, or 56 cents, a year earlier. The company said its profit from continuing operations was $224 million, or $1.21 a share, topping the $1.01 a share expected by analysts.
Northrop’s turnaround was fueled by increased revenue from the F-35 and F/A-18E/F fighter jet programs, a boost in sales of its Global Hawk unmanned spy planes and a contract for a new generation of warships.
Northrop’s revenue jumped 57% to $6.6 billion from $4.2 billion, partly reflecting the addition of TRW Inc., which it acquired in December.
“We had a terrific quarter in all respects,” Northrop Chairman Ronald D. Sugar said, adding that he didn’t expect defense spending to let up anytime soon. There has been a divergence of opinion on Wall Street “regarding the sustainability of growth in defense spending, but everything we see points to a solid sustainable growth.”
With the ramping up of Pentagon spending, Northrop said it would hire an additional 600 engineers to work on the F-35 program in El Segundo and Redondo Beach. And the company raised its 2003 earnings estimate from continuing operations to $4.20 to $4.30 a share, from $4 to $4.25 a share.
Northrop employs about 24,000 workers in Southern California and has recently been on a hiring binge, adding about 1,000 engineers this year.
Shares of Northrop, the nation’s third-largest defense contractor, rose $2.86 on Wednesday to $90.36. Shares of Chicago-based Boeing, the No. 2 defense contractor and Southern California’s largest private employer, climbed $2.46 to $38.50. Both trade on the New York Stock Exchange.
The largest U.S. defense contractor, Lockheed Martin Corp., which beat analysts’ expectations when it reported results Tuesday, saw its shares rise $1.43 to $46.94 on Wednesday. In fact, most defense stocks went higher, and the Philadelphia Stock Exchange’s index of defense companies was near a 52-week high after rising 3.5%.
Defense stocks had been sluggish mainly because of worries that military operations in Iraq and a stagnant economy could reduce spending on new weapons and military systems. The latest results seemed to dispel those concerns.
“There has been a considerable underestimation of how fast the growth in defense spending would be,” said Paul H. Nisbet, senior aerospace analyst for JSA Research Inc.
The biggest beneficiary of Pentagon spending was Boeing, which has suffered from the severe downturn in the commercial aircraft industry.
Boeing continued to draw a grim picture for its passenger jet business, predicting that a recovery wouldn’t begin until at least 2005. As previously announced, Boeing took a pretax charge of $184 million, equivalent to 14 cents a share, to cover costs of shutting down production of its 757 line of jetliners.
Boeing’s third-quarter net income fell to $256 million, or 32 cents a share, from $372 million, or 46 cents, in the year-earlier quarter. Analysts had forecast a profit of 25 cents a share in the latest quarter.
Boeing’s revenue fell 4% to $12.2 billion, but the company surprised analysts by raising its revenue projections for the year by $1 billion, to $50 billion, saying the firm was benefiting from higher Pentagon spending on aircraft, missile defense, military satellites and computer systems.
Boeing’s commercial aircraft revenue slipped 17% to $5 billion as deliveries of planes fell to 65 in the current quarter from 73 a year earlier.
Operating earnings at its defense units rose 38% to $561 million, helping offset the sharp drop in commercial aircraft earnings. Its defense business revenue was up 12% to $7.3 billion.
Boeing Chairman Philip Condit said Boeing’s troubled launch and satellite services unit, much of it based in Southern California, could face additional job cuts, mostly from the closing of excess facilities. Plagued by cost overruns, legal woes and a big drop in demand for commercial satellites and rockets, the unit’s workforce in the region has been cut in half in recent years.
