St. Petersburg Times April 04, 2003
Where's the Boom?
By KRIS HUNDLEY
Weapons makers haven't seen a surge in orders from the military despite depletion of inventory in the Iraq war.
Cruise missiles and precision-guided bombs may be dropping on Iraq like a flurry of deadly hailstones. But so far, the 15-day-old war is not translating into a business bonanza for the nation's defense contractors.
The reason: With the possible exception of the inventory of Tomahawk cruise missiles, which has been depleted by a third in the first two weeks of war, the U.S. military has plenty of weapons in its stockpile.
And though the Iraqi conflict is costing an estimated $400-million a week, that's being spent on everything from soldiers' pay to oil field cleanup. In the context of multibillion-dollar defense budgets - $380-billion requested for 2004 - the conflict in Iraq, so far at least, has barely registered as a blip on the balance sheets of the biggest defense companies.
"The relative upside in near-term orders is muffled by the overall size of these businesses," said Chris Mecray, defense analyst for Deutsche Bank Securities. "There's a healthy outlook for the defense industry because of the underlying business. But short of losing significant equipment - like a helicopter a day for months - replacement will happen gradually. Very real money will be directed to contractors, but it most likely will be obscured by the overall picture."
Confusion and naivete about the war's impact has been reflected in the share prices of key defense contractors in recent weeks. After a run-up post Sept. 11, 2001, stocks in the defense sector have been bobbing up and down based on news from Iraq. Most are trading at prices close to 52-week lows.
Paul Nisbet, analyst with JSA Research in Newport, R.I., is generally bullish on defense stocks, but he acknowledges there's lots of noise in the market now.
"We feel they're undervalued and will do well over the long term," he said. "But they'll be quite volatile until the speculative money is out of the market."
It's little wonder defense companies are on the minds of investors who are glued to round-the-clock war coverage. The military campaign has created a prime-time showcase for contractors' latest technology.
The unmanned Global Hawk made by Northrop Grumman Corp. is believed to be providing high-resolution intelligence and surveillance images of enemy targets.
Upgraded Patriot missiles, known as the PAC-3 and made by Lockheed Martin Corp., have intercepted Iraqi missiles. Unfortunately, Patriot missiles have also been involved in "friendly fire" incidents, in one case destroying a British fighter jet and killing its two-man crew. Now the Patriot is a suspect in the downing of a U.S. Navy F/A-18C Hornet, flown from the carrier Kitty Hawk on Wednesday.
Despite military reports that Patriots have so far destroyed eight of 12 Iraqi missiles fired at coalition forces, outside observers aren't convinced. "Does the Patriot work? The short answer is, we don't know," said John Pike, a defense technology expert at GlobalSecurity.Org in Alexandria, Va. An earlier version of the Patriot was portrayed as a high-tech marvel during the first Gulf War in 1991, but was later found to have scored far more misses than hits.
More sucessful this time around - and considerably less expensive than the $2-million Patriots - are the Joint Direct Attack Munitions, or JDAMs, made by Boeing. JDAMs are satellite-based guidance systems strapped onto traditional bombs to make them "smart." The Pentagon ordered nearly 20,000 more JDAMs in September in anticipation of war, a $378-million contract. Boeing is currently cranking out about 2,500 a month.
Even with JDAMs providing the guidance on more than 9,000 bombs dropped so far on Iraq, the Air Force is not worrried about running short. James G. Roche, secretary of the Air Force, told reporters this week that the JDAM supply is sufficient. "Right now the JDAMs on the B-1 is the weapon of choice," he told Jane's Defense Weekly.
Of creeping concern is the Navy's inventory of Tomahawk cruise missiles, made by Raytheon Corp. in Tucson, Ariz. More than 700 of the low-flying, highly manuverable weapons have been used out of an inventory of about 2,000.
The Navy has asked Raytheon if it could speed up production of the latest version of the missile, known as the Tactical Tomahawk, should funding become available. These missiles, which have the ability to loiter for two or three hours before being assigned a target, are not yet in use in the field, and first deliveries are not expected until mid-2004.
Jennifer Allen, a Raytheon spokeswoman, said the company, which currently has $260.5-million in contracts for 192 of the newest Tomahawks, said the company stands ready to help. "If the funding becomes available, we'll be well-positioned to respond if needed," Allen said. "But all this has still not been finalized."
The Navy, meanwhile, said Thursday it intends to buy 2,194 of the newest Tomahawks over the next six years, at an average cost of about $600,000 each. That's considerably less expensive than the older versions now being used in the field. The Tomahawks being fired in Iraq, a combination of refurbished earlier models and a line that ended production in 1999, cost about $1-million each.
Peter W. Singer of the Brookings Institution in Washington, D.C., said he expects concerns about shortages of Tomahawks will pass quickly. "They always shoot off a ton of these at the start and then worry about not having enough," he said. "It's a repeating process. All that does is add to the impetus to buy more."
Singer said one sector that will see a boomlet of business during war are the growing number of contractors performing day-to-day service on the battlefield. During the first Gulf War, Singer said the ratio of private contractor to U.S. soldier was one to 100; now it is one to 10.
"These companies aren't supplying goods, they're supplying services, everything from logistics to software support to weapons maintenance," he said. "Whenever the military tempo increases, these companies' activities bump up."
Among the key players in this niche are Kellogg Brown & Root, which has provided food, laundry and mail services for the military, and B-2 bomber mechanics from Northrop Grumman.
Once the battles are over, many of these same companies are expected to play a major role in post-war reconstruction. Singer said the outcome and duration of the war also will determine what programs and companies will benefit in future defense budget battles.
"If the war goes according to plan, with a quick punch into Baghdad, transformative technology will get more support," he said, citing the 4th Infantry Division, the first Army unit to be fully equipped with digital communications, as an example. "There will be a demand for lots more UAVs (unmanned aerial vehicles) and more guided munitions. My guess is, we'll see an increased demand for reconnaisance and intelligence assets as well as bandwidth, which is not particularly sexy but needed."
If, however, the war bogs down, advocates for more traditional, heavy mechanized equipment, will get a boost. "I also expect that if we run into problems in Baghdad with urban warfare, and learn that certain systems are useful while others are useless, purchasing directed toward that scenario could grow immensely," Singer said.
A long, drawn-out conflict would also mean more dollars will be diverted to running the war rather than to making high-tech tools. Richard L. Aboulafia, vice president of the Teal Group in Fairfax, Va., said with Congress balking at President Bush's $75-billion war appropriations request, it's not clear how the dollars will be divvied up.
"There might be a negative impact on defense contractors if the war drags on and they have to spend more on grunt work," he said. "Remember, there's a limited pool of cash despite heavy deficit spending."
Copyright © 2003, Times Publishing Company
