U.S.A.: Defense Contractors See Strong Earnings

Contractors are reaping rewards of a surge in defense spending from a little over $300 billion before the September 11, 2001 attacks on the United States to about $500 billion now.
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U.S. defense contractors reported strong quarterly earnings on Thursday as the Pentagon put billions into high tech military equipment and services.

Earnings soared 76 percent at Northrop Grumman Corp. <NOC.N>, 30 percent at Raytheon Co. <RTN.N> and 22 percent at Goodrich <GR.N>. All three aerospace and defense companies beat analysts earnings forecasts, and they raised their earnings outlooks for the rest of the year.

After the news, shares of aircraft part maker Goodrich rose 6.4 percent, while Northrop Grumman stock was up 1.6 percent and Raytheon's shares were 1.9 percent higher.

"Everybody's coming in like gangbusters," said Paul Nisbet, an analyst with independent research firm JSA Research. "They were all well above expectations, and there is certainly every indication of increased guidance for the year on all three."

Defense contractor Lockheed Martin Corp. <LMT.N>, which reported earnings this week, also beat forecasts and raised guidance for the rest of the year. However, results from No. 2 defense contractor General Dynamics <GD.N> were seen as being weak.

Demand from the Pentagon as well as the Department of Homeland Security also boosted results at Titan Corp. <TTN.N> which provides intelligence and translation services. Titan said on Thursday its earnings rose sixfold, sending its shares 2.9 percent higher.

Contractors are reaping rewards of a surge in defense spending from a little over $300 billion before the September 11, 2001 attacks on the United States to about $500 billion now, Nisbet said.


"On the military side we've had a strong defense budget for four years ... and it takes a long time for that to get into the bottom line of these companies," Nisbet said. "We're now beginning to see the impact of these increases."

He added that the Iraq war has created demand for about $8 billion a year in weapons replacement and repairs.

However, President Bush's latest proposed budget aims to reduce funding for aircraft, missile defense and shipbuilding programs.

"We've been saying for quite some time that defense spending is probably going to slow. The question is what rate does it slow to," said Nick Fothergill, an analyst at Banc of America. He said spending on weapons programs could slow to 3 to 4 percent from 7 percent.

"Procurement and R&D will slow down a bit but at least it will still be growing," Fothergill said.

Several contractors are also seeing strong demand for information technology and communications products as the Pentagon tries to build a more "networked" military.

"Sometimes we think of ourselves as a shipbuilder, as an airplane company, but if you stand back and you look at our revenues ... we're driven by information technology, systems integration and electronics," Northrop Chief Executive Ronald Sugar said in a conference call on Thursday.

Increased spending would probably be focused on the U.S. Army to the detriment of the Navy and Air Force, Fothergill said. He added that General Dynamics and United Defense Industries Inc. <UDI.N> -- being taken over by BAE Systems Plc <BA.L> -- would be the prime beneficiaries of such a shift.

Companies in the civilian aircraft market such as Raytheon and Goodrich also benefited from strong demand, both as airlines upgraded old planes and passenger jet makers Boeing Co. <BA.N> and Airbus <EAD.PA> ramped up production, Nisbet said.

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