Defense Industry Hopes Rekindled

Article excerpt

TALK about the coming of the cavalry!

Just when it looked like the United States defense industry was at last cornered by Congress and awaiting significant and humbling budget cuts - given the ending of the cold war with the Soviet Union and the need to reduce the federal budget deficit - along comes a "rescuer" named Saddam Hussein.

Thanks to Iraq's invasion of Kuwait, the US defense industry is back in the saddle, and talking about the need for not only keeping current defense spending levels intact, but also for underwriting expensive new programs. At the end of August, for example, Lockheed Corporation unveiled a futuristic aircraft - the Lockheed YF-22 fighter - which is competing for a new contract along with a plane made by Northrop Corporation. In showing their prototype, Lockheed officials said the new plane was needed for just such incidents as the Iraq crisis.

Whether Congress will opt for expensive new weapons programs seems questionable, but "there's no question that the defense budget will be cut less than had been expected," says Arnold Kaufman, editor of Standard & Poor's Outlook, a weekly market report.

For a year or so, a number of defense contractors are expected to get a business boost from the Iraq crisis. Some defense stocks, particularly in the aerospace/defense electronics sector, are finding themselves once again in vogue, according to Dennis Jarrett, market strategist for Kidder, Peabody & Co. "What the Iraq crisis has done is make everyone look around and recognize that the world is not as idyllic a place as we had all thought," Mr. Jarrett says. The defense sector is suddenly "looking much better" than it had been, prior to the Aug. 2 invasion, he says. Investors realize that a number of defense stocks have been trading at very low cost, relative to their underlying value, Jarrett says. Among diversified electronics firms noted by Jarrett are Litton Industries Inc., Loral Corporation, Raytheon Company, and Varian Associates.

Market analysts dealing with defense companies see short-term gains for two types of firms: defense suppliers, who provide food products, uniforms, and other essential equipment to the military, and some specific contractors that produce weapons systems or aircraft. …