Cold War, Hot Stocks; Rumsfeld's Pentagon Modernization Campaign Has Stalled. That's a Boon to the Makers of Old-Style Heavy Weapons
Byline: Stephen Glain
The Pentagon's spending plans were no secret on Wall Street. Share prices of top U.S. defense contractors began soaring months ago, in anticipation of the Pentagon's Quadrennial Defense Review, which was released last week. The early buzz was clear indication that Defense Secretary Donald Rumsfeld's efforts to modernize the American military had stalled. And indeed, the new spending map leaves intact the sky-high budgets for heavy weapons with roots in the cold war--including Lockheed Martin's F-22 fighter jet, Northrop Grumman's DD(X) destroyer and Raytheon's electronic communications systems. "Institutional investors have been following the QDR tea leaves for some time," says John Kutler, president of Quarterdeck Investment Partners, an investment bank that specializes in aerospace and defense. "They concluded that there won't be [the] programmatic cuts on the hardware side that some worried about."
Since he came to office five years ago, Rumsfeld has criticized many of the weapons on the military's wish list--multibillion-dollar fighter jets, warships, submarines and transport vehicles--as relics that suck resources away from the weaponry needed to create a lighter, smaller and more efficient military. The new QDR, an exhaustive study of threats to U.S. national security and how best to meet them, suggests the brass is digging in against a lame-duck secretary. No major weapons programs are earmarked for cancellation, according to analysts, and the issue of ballooning defense expenditures at a time of record budget deficits is deferred. That point was confirmed in the Bush budget announced last week, which gave the Pentagon a higher-than-expected 7 percent increase for weapons procurement and research. The stock-market result: over the last three months, Lockheed is up by 19 percent, Northrop by 15 percent and Raytheon by 14 percent. "The politics surrounding defense procurement is as difficult as ever," says Doug Berenson, a defense-industry specialist at DFI International, a Washington consulting firm. "The coalition of interests around these programs are so strong that even the secretary of Defense can't control them."
Deliberations over the QDR began months ago with Rumsfeld and his inner circle at the heart of the process, says Frank Cevasco, president of Cevasco International, a consulting firm that specializes in defense. …