- The Washington Times - Tuesday, July 16, 2002

An estimated increase in the federal budget deficit sent most aerospace and defense stocks down yesterday. General Dynamics, the Falls Church defense contractor, was not immune.
The Office of Management and Budget said Friday that the deficit for 2002 could be as much as $165 billion, up from a February estimate of $106 billion.
General Dynamics' shares fell yesterday $2.06 to $94.25, their lowest level in almost three months, and have fallen more than $8 since July 1. Some analysts said the deficit concern has scared off some investors, who may not be as confident in a long-term increase in defense spending by the government.
"This could make investors recognize that the federal budget cannot support double-digit increases in defense spending indefinitely," Wachovia analyst Sam Pearlstein said in a research note released yesterday. "The revised deficit estimate should not affect the [fiscal 2003] appropriations bills currently in the House and Senate, but could be a factor in the budget debates for [2004] and beyond."
Also yesterday, a German newspaper reported that General Dynamics was in talks to buy Eisenwerke Kaiserslautern, a prominent military-engineering company there.
General Dynamics declined to comment on the report, which appeared in the Financial Times Deutschland and cited EWK interim Managing Director Peter Herrmann as saying General Dynamics was one of many potential bidders. EWK is best known as a maker of floating bridge systems for the military, but reportedly has heavy debts. It has annual sales of about $50 million and has 330 employees.
It was not clear whether the news of the talks with EWK affected General Dynamics' stock price. Most analysts had not read the article, but said the news was not surprising given the company's recent moves to increase its presence in Europe.
Last summer, it bought two Spanish companies with more than $2 billion in backlog, including a contract to make the Spanish Leopard battle tank, under license by a German company. It also won a $7.9 million contract to make rocket engines to support German automated-transfer vehicles.
Analysts yesterday said there was nothing fundamentally wrong with General Dynamics.
"They're all getting massacred the whole aerospace group," said Paul Nisbet, an analyst with JSA Research in Newport, R.I.
Mr. Nisbet and other analysts said many defense and aerospace stocks shot up this year, and now many investors are cashing in.
Shares of Bethesda-based Lockheed Martin have fallen from $68.55 to $58.55 since July 1, and shares of Los Angeles-based Northrop Grumman have fallen from $118.19 to $107.256. Also, Boeing Co., based in Seattle, has seen its shares drop from $44.60 to $39.76.
"Most stocks we follow have risen in 2002," Merrill Lynch analyst Byron Callan said in a research note yesterday. "Investors are locking in profits."
General Dynamics will report second-quarter earnings tomorrow. It reported net earnings of $229 million ($1.13 per share) for the first quarter ending March 31, compared with net earnings of $212 million ($1.05) a year earlier.

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