The defense industry is under attack in Washington.
Its new ships are too expensive, and its new howitzer is too heavy, critics say. Its new tilt-rotor plane is too dangerous. And its three new models of fighter jets are just too many.
Every dollar spent on defense acquisitions is under scrutiny by the new administration, and every new military gadget is a potential victim. Half a trillion dollars in defense projects is in play, and the fortunes of some of the nation’s largest corporations could rise or fall on the outcome.
On Wall Street, no one seems to care.
One after another, the country’s top defense contractors have posted a string of strong earnings reports so far this year. Their stocks continue to perform well, and many are trading at prices more than 50 percent higher than they were 10 months ago.
“The health of the industry is pretty good across the board, even with the concerns that are out there,” said Sam Pearlstein, a defense analyst for First Union Securities. “There are a lot of reasons to think the sector can still be a good performer.”
Since March, when technology stocks peaked and the Nasdaq index began its plunge, the defense industry has become a refuge of sorts.
After bottoming out just as Internet stocks crested, defense stocks rose more than 150 percent last year, topping every other sector of the Standard & Poor’s 500 index.
Defense stocks have tapered off this year but were nudged up again in recent weeks as defense contractors wowed Wall Street by reporting earnings for last year that were better than expected. Northrop Grumman Corp. posted a $429 million profit for last year, fueled largely by the success of its electronics division.
Lockheed Martin Corp. exceeded Wall Street’s expectations last month by predicting an increase in profits of 25 percent to 30 percent this year.
General Dynamics Corp. reported an 11 percent increase in earnings for the fourth quarter. Boeing Co. posted a 36 percent increase.
Companies that limped through 1998 and 1999, when many of them cut back, restructured and consolidated, have emerged as attractive havens for investors weary of technology stocks.
“Raytheon, Boeing, General Dynamics, Northrop Grumman — they’re all doing well, even in an economy that seems to be slipping,” said Paul H. Nisbet, an analyst for JSA Research Inc. who has “buy” ratings on Boeing, Lockheed Martin, Northrop Grumman and several other industry stocks. “Things have really turned around.”
Not everyone is so sure.
Some analysts think that the industry is inflated and ready to pop, that stocks are overvalued and that the recent strong earnings reports are weak reports in disguise.
Numerous companies have earnings that are clouded by the expensive one-time costs of selling divisions and restructuring. Some, such as United Technologies Corp. and Raytheon Co., overestimated those costs one year and reported the difference as income the next.
Other companies — Lockheed Martin and Raytheon chief among them — are carrying debts approaching $10 billion.
Still others pad their profits with healthy stock-market gains from their employee pension funds, which can sometimes be reported as income. Northrop Grumman is a prime example.
The defense industry is vulnerable to the whims of Congress and the president.
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And President Bush has indicated that his whims might soon be exercised. He promised during his campaign to increase defense spending in general, but his initial proposals include increases only for salaries and benefits, not for weapons systems.
The president has ordered a review of all of the Pentagon’s large spending programs, with instructions to find areas to save money and perhaps “skip a generation” in technology advances. That could mean cancellation of projects that are particularly expensive or those that promise only marginal improvements in military performance or readiness.
Among the projects under review:
– Three new fighter planes are in development. They are Lockheed Martin’s F-22 Raptor, Boeing’s F/A-18E/F Super Hornet and the Joint Strike Fighter, for which both companies are competing. Bush administration officials have questioned whether all the planes are necessary.
– A new Zumwalt Class of Navy destroyer is being developed — in part by Raytheon, Lockheed Martin and Bath Iron Works, a General Dynamics company — and hailed as the first revolutionary vessel design in decades. But at $25 billion for 32 ships, its value is in dispute.
– The Crusader, an automated artillery system designed to fire a dozen 155 mm shells a minute, is expected to cost $13.7 billion for 1,100 units. Some analysts think the 40-ton unit is too heavy and cumbersome for the Army’s rapid-deployment strategies. General Dynamics and Raytheon are involved in the production.
– The V-22 Osprey, a tilt-rotor aircraft built by Boeing and Bell Helicopter, is planned as a Marine transport, with room for 24 combat soldiers or 10 tons of cargo. But two of the planes have crashed in the past nine months, killing 23 Marines, and its safety and usefulness are under review.
– A prototype of the Army’s RAH-66 Comanche Helicopter, built by Boeing and Sikorsky Aircraft, a subsidiary of United Technologies Corp., is flying, and the armed reconnaissance aircraft is on schedule to join the force in 2006. But the General Accounting Office recently criticized the Pentagon for rushing the helicopter to production without adequate flight tests.