In anxious markets, defense contractors are a safe, stable bet

Published 29 January 2008

Market anxiety and worries about recession notwithstanding, U.S. defense companies are doing fine — and expect to be doing fine in the coming year; an analyst says that the defense industry is “a pillar of stability compared to the turbulent markets in other industries”

Global markets may be anxious and the U.S. economy may be on the brink of recession, but for many of the U.S. largest defense firms, the good times keep going. Most have posted big earnings gains in recent years, largely due to record Pentagon spending on weapons programs and the wars in Iraq and Afghanistan. AP’s Stephen Manning writes that with the government, rather than consumers, as their biggest customers, defense contractors will likely weather any economic downturn that may lie ahead. “We are about as far removed from the credit risk and those sorts of matters as you can imagine,” Robert Tanner, Lockheed Martin’s chief financial officer, said last Wednesday. “We feel sort of insulated.” The benefits of that relative safety are also showing up on their balance sheets. Lockheed, which makes fighter jets and is the world’s largest defense contractor, reported a 10 percent increase in fourth-quarter profit Thursday and boosted its 2008 per share outlook by 10 cents. Ship builder Northrop Grumman’s net fourth quarter earnings were roughly flat Thursday, but the company had record quarterly revenue and forecast earnings growth in 2008. On Wednesday, General Dynamics, which makes everything from armored vehicles to bullets for the army, reported a 42 percent spike in fourth-quarter earnings. The company said it has not seen any shortfalls in orders in its private jet unit, the one segment of its business which could be vulnerable to any reductions in corporate spending during a downturn.

Analyst Paul Nisbet of JSA Research noted that defense firms are meeting or exceeding Wall Street earnings predictions and said the sector will likely continue to be strong as long as defense spending remains high. “It is a pillar of stability compared to the turbulent markets in other industries,” he said.

Shares of Bethesda, Maryland-based Lockheed rose $4.51, or 4.4 percent, to $106.20 in afternoon trading last Thursday. Northrop shares dipped 38 cents to $77.94. Lockheed reported a profit of $799 million, or $1.89 per share, compared to a year-earlier profit of $729 million, or $1.68 per share. Net sales were flat at $10.84 billion. Analysts polled by Thomson Financial, on average, expected earnings of $1.69 per share on sales of $10.73 billion. The company raised its forecast for 2008 earnings per share to a range of $7.05 to $7.25 per share, from a range of $6.95 to $7.15 previously. Analysts expected earnings of $7.29 per share for the year. Lockheed said its brighter outlook is the result of a better performance in its aeronautics division. It had earlier forecast a sales drop of about $1 billion this year as it shifts between making older F-16 jets to the new F-35 fighter plane. Tanner said, however, that costs savings will trim that drop in plane sales to about $850 million.

Los Angeles-based Northrop said that net income for the October-December period was $454 million, or $1.31 per share, compared with $453 million, or $1.28 per share, in the prior-year period. Per-share earnings increased as the number of shares outstanding declined. Income in the fourth quarter of 2006 included a pretax gain of $111 million, or 21 cents per share, from the sale of the company’s TRW Automotive unit. Earnings from continuing operations rose to $1.32 per share, a penny better than analyst expectations, according to Thomson Financial. Sales rose 10 percent to $8.82 billion from $8.01 billion, surpassing Wall Street estimates of $8.44 billion. Looking ahead, the company said it expects 2008 profit from continuing operations of between $5.50 and $5.75 per share. Wall Street is looking for $5.60 per share in the current year.

The level of defense spending in coming years is unclear, however. The Senate passed a $696 billion budget last Tuesday, including $189 billion for wars in Iraq and Afghanistan, which will go to President Bush for his expected signature. Some analysts have warned, however, that a new president and possible troop reductions in the future could end up hurting defense suppliers in the long run.

Northrop CEO Ronald Sugar said he expects defense spending in the 2009 budget, while still in early stages, should also grow. He also said Northrop, with its multiyear weapons programs, is largely shielded from changes in the supplemental budgets the White House has relied on in recent years to fund the wars. “Every indication we have is that there will be a continued growth of reasonable proportions in the basic budget,” he said.