- The Washington Times - Monday, October 28, 2002

President Bush's signing of a defense-budget increase did not inject much life into defense stocks last week, and shares of many companies were dragged down after news of falling income for pension funds.
The $355 billion defense bill for 2003 increases spending by more than $34 billion this year, with hefty increases for funding new fighter-plane programs and producing laser-guided bombs and missiles. But the budget was about $25 billion smaller than Mr. Bush's proposal, and analysts said any budget-related rise in price of defense stocks had already occurred earlier this year.
The Standard & Poor's 500 Defense Index rose 67 points, or 0.3 percent, after the signing Wednesday. Big defense firms, including Falls Church-based General Dynamics Corp., Bethesda-based Lockheed Martin Corp., and Northrop Grumman Corp. and Boeing Co. all saw shares fall.
Meanwhile, several defense companies said last week that pension plans would hurt earnings, even as they reported increased profits for the third quarter.
Raytheon Corp., the fourth-largest U.S. defense contractor, announced Wednesday that profits of $228 million (56 cents per share) compared with a net lost of $280 million (78 cents) during the same quarter last year. But the company said it would take a charge of as much as $2.5 billion because of stock losses in its pension plans and that 2003 earnings would be below some forecasts.
Lockheed Martin, the top U.S. defense firm, said Friday that net earnings rose from $213 million (50 cents per share) to $290 millon (64 cents) in the third quarter compared with last year. But the company said pension obligations this year would reach $100 million, after paying out $8 million last year.
The company projected that it will spend $150 million to $200 million in both 2002 and 2003 for the health care and life-insurance costs of its retirees. The announcement spooked some investors, and shares of the company slid $2.37, or 4 percent, Friday on the New York Stock Exchange.
Lockheed Martin's earnings increase came from newer programs such as the Joint Strike Fighter and F/A 22 aircraft, both of which will get more than twice as much funding in 2003. But analysts said those funding increases were forecast as far back as February and have already been valued into the company's stock.
"Management raised some of its projections, but we are already there," Merrill Lynch analyst Byron Callan said in a research note.
Boeing, whose shares have tumbled in the past year because of a slump in the commercial-airline sector, said earlier this month that it would get little or no income from pension investments next year, after earning $500 million this year and about $1 billion in 2001.
A war against Iraq could have some effect on shares of defense stocks, and Raytheon and Boeing are particularly poised for benefits because of their production of laser missiles and "smart bomb" kits. But a Reuters news agency poll of economists released yesterday said a short and decisive war on Iraq would have little effect on the U.S. economy as a whole. An increase in military expenditures would only serve to offset declines in spending and investments, economists said.


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