Financial Markets' View of Defense Industry Should Concern the Country

Article excerpt

The ups and downs of the stock market notwithstanding, there are many reasons for the dot-com firms to be optimistic about the future. Unfortunately that is not the case for the defense industry

Recently I heard someone compare the dot-toms to defense companies. Specifically, he compared the combined market capitalization of the five top companies in defense industry to the five biggest dot-toms. That comparison showed that the dot-toms had a market capitalization almost five times greater than the defense industry. Interestingly, the combined earnings of the same dot-toms was a net loss, while the combined earnings of the five top defense producers was more than $4 billion.

We could view this as an interesting bit of trivia, but it clearly is more than that. The financial markets are making a statement about the dot-toms. And they also are sending clear signals about their perception of the defense industry.

In recent months, Wall Street has sent defense stocks plunging to a 12-month low. What the markets are saying, therefore, is that, regardless of this year's increase in defense procurement budgets, the future is not bright for defense, even if many companies' balance sheets are showing profits.

Perhaps it would be of interest to look at the defense industry with the eyes of an investor. For instance, would a prudent investor be interested in putting money into a sector that has been shrinking in size for the last 10 years? Would that investor be interested in a sector that has, essentially, only one customer-and that customer has been known to act indecisively, to change its mind frequently, to take too long to pay its bills, and to periodically resort to Law suits where criminal-like penalties result from only civil-level evidence (under the False Claims Act)?

Further, markets and investors don't like uncertainty. Unfortunately, the defense sector has plenty of that.

Next year's Quadrennial Defense Review (QDR) could change spending priorities; a national panel is about to render yet another report on ways to keep defense industry healthy; the Army is attempting to transform itself into a more mobile force; and changes seem imminent to the Joint Strike Fighter acquisition strategy. This set of possibilities is yet another reason for the markets to shy away from defense.

Short-term market vagaries aside, there are other significant reasons why investors will be inclined to shun defense stocks. These reasons have to do with the makeup of the workforce. …