Defense Contractors Stick to Their Guns

Northrop, Lockheed and Raytheon are reaffirming guidance and signing new contracts.
By Yi Ping Ho ,

Preannouncement season isn't the most uplifting time of the year, with companies taking down their guidance and complaining about a lack of visibility, but defense contractors are doing everything they can to stand out from the crowd.

Northrop Grumman

(NOC) - Get Report

,

Raytheon

(RTN) - Get Report

and

Lockheed Martin

(LMT) - Get Report

are reaffirming their guidance and announcing contracts at a global aerospace conference in Paris.

The

Dow Jones U.S. Aerospace Index

has risen about 39% since the end of May 2000. And observers believe the sector has more room to climb, given the Bush administration's policy on defense spending and the overall growth expectations for commercial and business jets.

Northrop Grumman, which is based in Los Angeles, expects to post sales of $18 billion by 2003, fueled by growth in the defense electronics and information systems business. The company, which recently closed its acquisition of

Litton Industries

, also expects "double digit" growth in earnings for 2002 and 2003.

The company expects the Litton acquisition to add $1 billion in sales to its electronic communications business and generate $250 million in near-term savings, including $100 million in the first year.

"This is nothing new. This has been their guidance," said Paul Nisbet, an analyst at

JSA Research

in Newport, R.I. "Every company is guiding analysts towards improved performance over the next year or two. Generally speaking, the prognosis for the sector is good and I don't know if any company is not projecting close to double-digit earnings growth."

Additionally, Raytheon reiterated its goal of increasing earnings 10%, on a year-to-year basis, and is hoping for annual revenue growth of 4% to 6%, according to a

Reuters

report.

Meanwhile, Lockheed Martin told analysts that demand for the F-16 fighter plane is still strong, even as the company competes with

Boeing

(BA) - Get Report

for the Joint Strike Fighter contract, which is worth something north of $200 billion in the U.S. alone. Lockheed said potential buyers outside of the U.S. are "unlikely to get access to JSF until the mid-teens.'' Therefore, according to Reuters, the company doesn't expect production of the F-16 to end any time soon.

Shares of Northrop recently lost 1% to $83.44 on the

New York Stock Exchange, while Raytheon dipped 1.8% to $31.45. Lockheed rose 0.7% to $36.99, and Boeing recently slipped 1.6% to $60.80.

Nisbet has a buy rating on both Boeing and Northrop, and he has a hold rating on Lockheed and Raytheon as "they've done well and are fully valued." The analyst also said he recently put

Honeywell International

(HON) - Get Report

on his buy list, as it has been "depressed" on news that its planned merger with

General Electric

(GE) - Get Report

may not happen.

The analyst seemed confident about the prospects for growth in the defense industry, noting that the Bush administration has formulated plans to divert funds toward improving and modernizing weapons and military gear. The analyst also added that the aviation market, including business and regional jets, "has been really smoking," and that he sees "uniformly strong activity in all sectors in the industry."

Additionally, the defense sector tends to offer some shelter from the vagaries of the economy. "It is also a long-cycle type of business," Nisbet said. "When the Navy decides to buy an aircraft carrier, it's eight to 10 years before they get it. The fluctuations of the economy in between placing of the order and receiving it doesn't impact the industry in the same fashion."

That said, the analyst admitted that parts of the industry, particularly the commercial aircraft sector, still rely on the uncertain prospects for an economic upturn. "If the economy slows down enough and the airlines have an extended period of losses, they will be looking to back away from some of these deliveries," he said. "But that has not happened yet."

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