BOSTON (TheStreet) -- Lockheed Martin (LMT) - Get Lockheed Martin Corporation (LMT) Report, Raytheon (RTN) - Get Raytheon Company Report, L-3 Communications (LLL) - Get L3 Technologies Inc Report and Northrop Grumman (NOC) - Get Northrop Grumman Corporation Report, the biggest U.S. defense contractors, have suffered share-price declines this year as government cost-cutting and shifting defense priorities hurt the industry.
But some of the companies have altered their tactics and stand to gain from the government's focus on cyber-warfare, computer-network security and drone aircraft.
President Barack Obama's debt commission recently recommended cutting $100 billion from the Pentagon's budget over the next five years, and a second proposal seeks to save $1.1 trillion by freezing military spending after 2012. While the aerospace and defense index of the
has risen in line with the broader index this year, Lockheed Martin, Raytheon and L-3 have all fallen on concern contracts will shrink.
What may have been overlooked by some investors is that the president earmarked $355 billion for cyber security in his fiscal 2010 budget, and spending on that program is expected to grow exponentially as computer-network security breaches and evolving threats reinforce the need for increased protection. Those same skills give the U.S. the ability to spy on or cripple a potential enemy's computer network.
Lockheed Martin, Raytheon,
Science Applications International
are all big players in that niche. And they've been competing to buy cyber-warfare and computer-security firms to push into the industry over the past few years.
Raytheon acquired Trusted Computer Solutions, a privately held network-security company, this month, its seventh acquisition related to the cyber-security market since 2007. The company also said it is hiring 300 engineers to build its cyber-security capabilities.
Boeing bought cyber-security firms Naurus in July and eXMeritus in June after purchasing three firms in that sector last year. The company calls its buying binge representative of "key moves in the company's strategy to expand its presence in the cyber and intelligence markets."
Not to be left out, Lockheed Martin, currently the largest government information-technology provider, is building a huge cyber-security facility in Gaithersburg, Md. Northrop bought Essex Corp., a cyber-security firm, in 2007. There may be more acquisitions on the way.
A few of the smaller, publicly traded IT and cyber-security firms doing government work include
Drone aircraft, which are remotely controlled unmanned aircraft, have proven their worth in the war against terrorism in Iraq and Afghanistan. That's another defense technology that the big defense contractors are chasing.
Drones, and their components, are now being manufactured by Boeing, Lockheed, Northrop Grumman and the U.K.-based
. Several of those firms also bought their way into the business through acquisitions over the past few years. General Atomics, the manufacturer of the Predator drone, currently the most frequently used drone aircraft by the military, is privately held.
, with a market value of a mere $488 million, is a maker of small drones, which in addition to their military uses are seeing new, non-military applications. Police are observing traffic flow and tracking fleeing criminals.
And defense contractors are also trying to position themselves to take advantage of a shift in national-defense strategy under way, the result of China's strengthening of its sea-borne military capabilities in Asia. If that is to be countered, defense contractors that supply the Navy will benefit.
That group includes Lockheed, Raytheon and
, which make sea-based missile defensive and attack systems, as well as ship and submarine builders, such as Northrop Grumman and General Dynamics.
General Dynamics may well be Wall Street's favorite defense stock. Of the 26 analysts that follow it, 16 rate it "buy" and 10 have it on "hold," according to Bloomberg. The company is also being helped by booming demand for its Gulfstream aircraft from the private sector. Its shares are down 4% this year, the smallest decline among the major defense contractors.
Raytheon is also seen to be in a solid position by Wall Street, as 10 of 22 analysts give it a "buy" rating and the rest give it a "hold."
Firms that are suppliers to defense contractors may have some immunity to the vagaries of defense spending.
, one of RBC Capital's highest-rated stocks, fits that mold as a manufacturer of cast-made parts.