Defense contractors look to cybersecurity for growth

that many investors think increased government spending for cyber security will offset revenues lost by defense contractors due to military spending cuts. Share prices for many defense contractors are continuing to rise despite program cuts under the new defense budget. Since early April when the new budget was announced, Lockheed shares have climbed 18 percent, Boeing shares have jumped 39 percent, General Dynamic shares have gained 34 percent, and Raytheon shares have improved 11 percent. This compared to a 13  percent rise in the S&P 500 during the same period.

In addition, earnings for this group remain strong; most large defense contractors recorded EPS gains and increased EPS guidance after the March 2009 quarter. Lockheed Martin raised full-year guidance by 10 cents to $7.15-47.35, Northrop Grumman increased guidance by 15 cents to $4.65-$4.90, and Raytheon boosted guidance by 10 cents to $4.55-4.70. Boeing was a notable exception; earnings for its defense business fell 18 percent year-over-year and Boeing cut full-year guidance by 35 cents to $4.70-$5.00.

Small defense contractors providing tools for existing military operations will benefit from $130 billion in funding for the Iraq and Afghanistan wars in the new defense budget. An $83.4 billion war-time supplement request has been submitted to Congress to cover Iraq/Afghanistan costs through the second half of 2009.

Shares of UAV maker AeroVironment have jumped 15 percent since the new defense budget was announced. In June AeroVironment received orders for a third global observer aircraft, the sixth contract option exercised under a program cumulatively valued at $120 million.

Newly public Optex Systems manufactures optical sighting systems for large Howitzer guns used to shell insurgent positions in Afghanistan. During the March quarter, Optex grew revenues nearly 20 percent and cut its net loss by half. Excluding non-cash intangible expense, the company would have recorded positive net income. Prior to the earnings release, Optex signed a new $7.5 million contract with the U.S. Army for laser-protected periscopes. The company’s shares began trading in early May and quickly climbed to $0.45 before retreating to the current $0.25 range.

General Dynamics is capitalizing on contracting opportunities in sensors and imaging by acquiring Axsys Technology, a manufacturer of high-performance sensors, in a transaction valued at $54 per share, a premium to Axys’s pre-merger share price. Axsys competes with Optex in military applications for sensors and imaging. This acquisition will likely focus increased attention on the optical sensor space and may cause Optex to emerge as an attractive  takeover candidate.