The Boston Globe April 10, 2003
An early end to fighting could give military contractors boost
By Ross Kerber
The US-led campaign in Iraq offers mixed messages for defense contractors struggling to adapt to the Pentagon's new emphasis on ''military transformation'' and high technology in its weapons budget, but an early end to the fighting may provide the boost to their stock prices that a hot war didn't.
It's too soon to pick major winners and losers, said Stephen Murphy, defense-industry analyst at CIBC World Markets in Boston.
But he said a shorter war can only help defense contractors by freeing up military spending for hardware.
''The scenario people were worried about in general about this was if it dragged on for six months or more, then it's a net negative for everybody because there would be more money spent on operations and not investment'' in new products, Murphy said.
Most defense stocks rose rapidly just after Sept. 11 because of rising defense spending, then lost value amid greater worries about the economy and individual problems. Lexington-based Raytheon Co. has hovered between $25 and $30 a share since last fall while the company tries to finish several drawn-out construction projects.
Shares in Boeing Co. have fared even worse because contracts for its new smart bombs, worth about $30,000 each, pale beside the bigger problems its civil-aircraft production faces. General Dynamics closed at $53.92 in trading yesterday, down from a high of $110.58 in June, hamstrung by the poor performance of its Gulfstream business-jet unit.
Broadly, transformation refers to increasing the use of communications and precision-guided weapons, in theory reducing the need for heavy armor, big ships, and other traditional arms.
Advocates for transformation already have pointed to the important role played by precision-guided weapons such as the Tomahawk cruise missiles made by Raytheon and the Joint Direct Attack Munition smart bombs made by Boeing and Textron Inc. of Providence.
Both weapons were heavily used in the attacks on Baghdad and elsewhere in Iraq. While full reviews aren't in, their producers will share in replenishment orders that began with a $75 billion supplemental defense budget passed by Congress last week.
But producers of more traditional weapons such as General Dynamics Corp. shouldn't be written off either, industry specialists say. The company produces the Abrams heavy tank that proved unexpectedly important in the urban combat around Baghdad.
''With respect to `transformation,' this war has got something for everybody,'' said Steven C. Grundman, a defense-industry consultant at Charles River Associates in Boston.
He and others say the Army might restore cuts made to its investment plans for heavy tanks, perhaps paid for by cutting back on the number of lighter Stryker combat vehicles it plans to purchase. The eight-wheeled Stryker also is made by General Dynamics.
John Pike, director of the research group GlobalSecurity.org in Washington, said Army divisions driving heavy tanks seemed to outpace the lighter armor used by the Marines in the race to Baghdad, such as the LAV-2, another eight-wheeled vehicle.
''The question I will be asking is what, if anything, does the slowness and difficulty of progress of the armies on the right-flank attack [mostly Marines] say about the wisdom of the Army's procurement of transformational vehicles?'' Pike said.
CIBC's Murphy said smaller niche players involved in areas like electronic warfare might expect more business if the war in Iraq winds down soon.
One problem for investors trying to make bets about the direction of procurement reforms is that Pentagon orders often take years to fulfill. The United States and the United Kingdom began the war with perhaps 3,500 Tomahawk cruise missiles between them, according to estimates, and fired more than 700, according to Centcom briefings.
But replacements haven't been ordered yet. Under Raytheon's most recent contracts with the armed services, worth $360 million to provide 192 new Tomahawks, deliveries won't be completed until August 2005. The amount of money isn't crucial for Raytheon, which had revenue of $16.8 billion last year.
The company says it was recently asked by the Navy if it could increase production to 50 Tomahawks a month from 38 currently.
''There will undoubtedly be some impact from the Iraqi war on the revenue of those of us in the defense business,'' Raytheon chief executive Daniel Burnham told an audience in Australia on Tuesday, according to Reuters.
''I think this impact tends not to be, based on historical experience, a sharp and immediate impact, but spread out over a number of years,'' he said.
Burnham said in his speech that Raytheon ''has aligned its capabilities to meet the priorities of our nations in this challenging new century,'' but didn't provide specific financial expectations from the war.
Copyright © 2003, Globe Newspaper Company.
