Defense contractors not expecting major windfall
By Michael Liedtke
Associated Press
SAN FRANCISCO — The Iraqi war isn't paying big dividends yet for the U.S. defense industry, even with President Bush asking for an extra $75 billion to pay the bills and the military depleting its supply of million-dollar missiles and other high-tech weapons.
Associated Press
After the first week of war, the stocks of most big military contractors were actually worth less than they were before the bombing began. And, with so much still contingent on how things go on the battlefield, the companies aren't likely to know what weapons and other equipment will be reordered, or how much the government will have to spend.
The guided missile destroyer USS Porter launches a Tomahawk missile toward Iraq. Raytheon, maker of the Tomahawk cruise missiles that have been pounding Baghdad, could benefit from a drawn-out war.
If the war drags on long enough to deplete the U.S. arsenal, it should generate extra business for defense contractors that provide ammunition and other supplies, analysts said. In the short term, however, the Pentagon still has plenty of artillery left from past shopping sprees.
"There will be some replenishing of stockpiles, but I don't think you are going to see a huge run-up in production," said analyst Eric Hugel of Stephens Inc. "This is one of those situations where you fight with what you came with."
It's unclear if the war will help or hinder the Bush administration's push to increase the annual defense budget by more than $100 billion, or about 25 percent, over the next five years.
"As long as the war turns out favorably, public opinion should stay behind Bush and there should be big increases in military funds through the end of the decade," predicted industry analyst Paul Nisbet of JSA Research.
If things go awry in Iraq, the war's critics may rally opposition to the steady rise in defense spending triggered 18 months ago by the terrorist attacks on the United States.
The war's progress also figures to influence future weapons purchases and shape the military's future spending decisions.
For instance, if high-tech weapons don't match the military's high expectations, the Pentagon might decide it needs to spend less on smart bombs and devote more money to researching even more sophisticated weapons or recruiting and training troops, said Peter W. Singer, an Olin Fellow specializing in defense issues for the Brookings Institution.
These wild cards are one reason most defense industry stocks have suffered even as Iraqi forces get hit by wave after wave of expensive smart bombs.
Shares of Lockheed Martin Corp., the nation's biggest military contractor, were down 4.2 percent since the fighting began. The stocks of the two biggest contractors, Northrop Grumman Corp. and Boeing Co., have declined by 4.3 percent and 5.5 percent, respectively. Raytheon is one of the few military contractors with stock holding steady, with the shares holding near their price of $28.35 before the war began.
The largest contractors that could benefit from a drawn-out war include: Raytheon, maker of the Tomahawk cruise missiles pounding targets in the Iraqi capital; Lockheed, maker of the Patriot missiles that have been intercepting Iraqi Scuds; Boeing, which makes devices known as "Joint Direct Attack Munitions," or JDAMs, that enable satellites to guide bombs to their targets; and Alliant Techsystems Inc., which supplies the soldiers with bullets.
Still, the war isn't expected to produce significant windfalls for defense contractors unless some of the military's big-ticket items — aircraft carriers, fighter jets and tanks are destroyed in battle. This kind of equipment is made by Newport News Shipbuiliding, Northrop Grumman and General Dynamics Corp.
An aircraft carrier, built by Newport, costs about $4.5 billion, according to the U.S. Navy. By comparison, even Tomahawks — with an average price of $1 million apiece — are relatively inexpensive, and the cost of those missiles is expected to drop by 50 percent for even more sophisticated versions in the future.
A big chunk of the Iraqi war budget requested from Congress will go to a hodgepodge of military services and support firms that help transport troops and equipment to the Middle East, analysts said.
The money also will help pay the wages of soldiers called up to fight the war.
Defense contractors could use a wartime lift. Their stocks have been slumping for the past 10 months, despite the buildup to the Iraqi war and the Bush administration's push for more military spending.
Part of the decline stemmed from investors' efforts to lock in their profits from a run-up in stocks after the Sept. 11 terrorist attacks.
Business ties with the battered airline industry have hurt Boeing, Raytheon and General Dynamics Corp. Boeing is the largest maker of commercial jets, Raytheon owns Beech Aircraft and General Dynamics sells Gulfstream jets.
The February explosion of the Columbia space shuttle has stung Lockheed Martin and Alliant Techsystems because they both supply the National Aeronautics and Space Administration.
Paying for the deficits in the employee pension funds of Lockheed Martin and Raytheon has disillusioned investors, too.
