- The Washington Times - Friday, January 25, 2002

The stocks of major defense contractors moved higher yesterday in response to President Bush's proposal for a $48 billion increase in defense spending for the 2003 fiscal year.
Rather than redirecting a significant portion of defense spending toward specific anti-terror programs, Mr. Bush chose to ask Congress to continue funding for major weapons systems such as Bethesda-based Lockheed Martin's Joint Strike Fighter and Los Angeles-based Northrop Grumman's Superhornet naval jets. The result was a windfall for the top five defense contractors, who also include Boeing of Chicago, Raytheon of Lexington, Mass., and General Dynamics, of Falls Church.
"Wall Street had not been anticipating anything near this kind of increase," said Paul Nisbet, an analyst with JSA Research in Newport, R.I. "The weapons were in the pipeline, but there was a lot of speculation that the programs would be cut and the money put into homeland security."
Stocks of the big five contractors rose between 2 and 5 percent yesterday.
The new budget, if approved by Congress as is, would boost overall defense spending by 13 percent to $379 billion. Of the increase, $10 billion would go into a "war reserve" contingency fund. The rest of the money would mostly go toward procurement, military health care, spare parts and replacement munitions.
The big surprise of the proposed budget was that it promises ample funding for existing "legacy" weapons systems that were developed and brought into production during the Clinton administration.
"When it comes to defense, the Democrats come up with the interesting ideas and the Republicans come up with the money," said Lorean Thompson, an analyst with the Lexington Institute in Arlington who added that he owns Lockheed stock.
Lockheed, for example, managed to persuade the Pentagon to keep funding the F-22 Raptor fighter, which is assembled in Marietta, Ga. Mr. Bush asked Congress to allocate $4.1 billion to buy 21 planes, well above the $3 billion for 13 aircraft that legislators approved last year.
"Lockheed Martin's near-term prospects look better than those of any other major defense contractor, and its stock has the greatest upside potential because its operations are concentrated in military aircraft, space systems and electronics the three areas where the defense budget is likely to grow the fastest in the next decade," said Heidi Thompson, a defense analyst with Morgan Stanley Dean Witter in New York.
The budget also preserves money for systems that many observers expected would be curtailed or killed.
The Army's Crusader mobile artillery system, for example, had come under sharp criticism for being too heavy and difficult to transport, but managed to elude the budget ax. The Crusader is manufactured by Arlington-based United Defense Industries, which is owned by the Carlyle Group, the District-based private equity firm headed by former Secretary of Defense Frank Carlucci.
Mr. Bush's plan would also steer money toward contractors who arm U.S. jets with the munitions they used to pound targets in Afghanistan over the past few months.
"If you're in a shooting war, the munitions makers always do well," said Christopher Hellman, a scholar with the Center for Defense Information, a research group.
Boeing, for example, manufactures the precision-guided bombs that the Pentagon relied on heavily during the Afghan campaign. General Dynamics produces more convention munitions that were also used. Both would see dividends from Mr. Bush's budget, the Lexington Institute's Mr. Thompson said.


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