- The Washington Times - Thursday, September 26, 2002

Military action against Iraq would provide a modest boost to many U.S. defense contractors, but the long-term outlook for the companies is not clear.
Defense industry analysts said a host of firms, including Lockheed Martin, General Dynamics and Raytheon, will reap financial gains from a conflict owing to their involvement in the area of "smart weapons" like guided missiles and drone jets, which analysts say would be heavily used in Iraq.
"That is an area that will bring immediate benefits," said Paul Nisbet, a defense and aerospace analyst with JSA Research in Newport, R.I.
Other companies like Alliant Technology Systems and L-3 Communications Holdings could see benefits from the need for "military consumables," such as bullets and spare parts. And Raytheon could get a boost from use of its Tomahawk cruise missiles, which made their operational debut during Operation Desert Storm.
But the effect of war is not clear across the board. Boeing Co. would be hurt by a conflict, analysts said. Company representatives have acknowledged that a lengthy war with Iraq could delay commercial aircraft orders through 2004, slowing the already-struggling industry's recovery.
"What we're hoping is that they'll start doing inspections in Iraq and we'll avoid the whole thing," Boeing's vice president of marketing, Randy Baseler, told Bloomberg News.
Key to Boeing's ability to withstand a war will be production of its Joint Direct Attack Missile kits, or JDAMs, which can convert normal warheads into guided missiles, or "smart bombs."
The JDAM kits had some success in recent action in Kosovo and Serbia, and Boeing earlier this month won a contract to make 18,840 of the kits over the next year for the Army and Navy. Each kit costs about $21,000.
Uncertainty over the length of any military action in Iraq and questions about whether it will happen at all have caused some analysts to express caution over buying shares of defense contractors.
"It is conceivable that a war could be far longer than expected, or involve other countries," said Merrill Lynch analyst Byron Callan in a research note Tuesday. "Ammunition and precision-guided weapons requirements could be far higher than anyone anticipates. It is also conceivable that there is no war, or that a campaign goes far better than expected and Iraqi resistance collapses in three weeks or less."
Standard & Poor's analyst Robert Friedman agreed: "These invasions are very volatile. People don't know the extent of them. You can't project what sustainable earnings will be."
The share prices of most big defense contractors have outpaced the market for the past year, but recent discussion about war with Iraq has slowed their growth. Last week, share prices of big companies dropped between 2 percent and 5 percent after Iraqi President Saddam Hussein said he would allow U.N. inspectors into the country. But they rebounded quickly after President Bush insisted Saddam's action had no bearing on the United States' desire to topple the Iraqi leader.
Over the past year, the Bloomberg Defense and Aerospace Index has risen about 10 percent, while the S&P; 500 has dropped 15 percent.
White House Economic Council head Lawrence Lindsey said last week that the cost of a war with Iraq could be between $100 billion and $200 billion. It was not clear how that money would be distributed, but one thing was certain, analysts said: Defense companies would not be the primary recipient.
Much of the money could be used to help reconstruct Iraq, analysts said, while other funds could go to forgive debts by countries that assist the United States in the war effort. Furthermore, some money would be set aside to fund a continuing troop presence in the region.
"In no way do we believe this figure should be seen as indicative of the amount that the U.S. defense industry would benefit," Mr. Callan of Merrill Lynch said.

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