- The Washington Times - Monday, March 24, 2003

A longer-than-anticipated war in Iraq is expected to improve the performance of many defense stocks, analysts said, even though shares of most defense contractors fell after military action began Wednesday night.
With coalition forces using bombs, missiles, fighter jets and tanks built mainly by U.S. defense contractors including Lockheed Martin, Raytheon, Boeing, General Dynamics and Northrop Grumman, some analysts said replacement orders could boost shares and inject life into a business sector that has posted sluggish stock performance during the past several months.
However, the start of war last week did not help the defense industry, which has seen its stocks fall more than 30 percent since May. Many analysts cautioned last week that war was only one factor in the valuation of defense stocks.
The Standard & Poor's 500 Aerospace and Defense Index fell slightly, from 172.19 to 171.90 between Tuesday's close and Friday. Shares of Lockheed Martin of Bethesda, the largest U.S. defense contractor, fell $1.54, or about 3.3 percent. Shares of General Dynamics of Falls Church rose 84 cents.
Analysts said last week that defense stocks did not climb because buyers started expecting a war in the fall, when President Bush first indicated that disarming Iraqi leader Saddam Hussein could require military action.
They also said defense stocks have been overvalued because a proposed 4 percent increase in the fiscal 2004 defense budget was smaller than expected. In fiscal 2003, the defense budget saw an 11 percent increase.
What's more, many defense companies, including Boeing and Raytheon, said they will have to shell out several hundred million dollars in the next few years to build up pension funds, which have become critically low.
Defense analysts said a short war would mean fewer weapons used, and thus less money spent by the Pentagon to replenish supplies.
Coalition forces in Iraq have launched hundreds of Raytheon-built Tomahawk cruise missiles and dropped hundreds of bombs fitted with Joint Direct Attack Munitions devices, which are built by Boeing and allow a bomb to be guided by a satellite directly to its target.
Raytheon and Lockheed Martin received a $280 million order last week to make laser-guided bomb kits to restock the inventory used during the conflict in Afghanistan.
Some analysts said a quick war might lead some opponents of defense spending to argue against more increases, because the United States is using only a fraction of its military capability. The military is using about 40 percent of its aircraft carriers, one-third of its combat aircraft, three of its 10 active Army divisions and one of its two Marine divisions in Iraq and Kuwait.
"If the U.S. can destroy Iraqi resistance with a relatively small portion of its combat power, what is the remainder needed for?" Merrill Lynch defense analyst Byron Callan asked last week in a research note.
With prospects for defense companies largely dependent on the U.S. defense budget, analysts said stock performance could be affected if the length of the war influences attitudes toward increases in defense spending.
"If this war goes as well as the consensus expects and the U.S. wins another overwhelming, stunning victory, it is bound to kindle a debate about the future of U.S. defense spending," Mr. Callan said.
But he said many lawmakers would support heavy defense spending, based on the belief that a strong military would deter enemies.
But a war that is too long could increase the U.S. budget deficit, creating a call for spending cuts, analysts said. Many said the defense budget could be targeted for cuts if the deficit grows to more than 4 percent of the nation's gross domestic product.
Mr. Bush will ask Congress this week for emergency defense spending of about $62 billion, most of it to pay for the war in Iraq, according to administration and congressional aides, Bloomberg News reported.

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