Gulf War Boosts Defense Electronics

By

THE Gulf war has rejuvenated one important segment of the United States defense industry in the eyes of Wall Street: companies that make sophisticated electronics and missile systems being used in the air-war stage of the conflict. Defense electronics firms are among the least-known of the major US defense manufacturers, although a few, like Raytheon and Martin Marietta, are familiar to millions. Most of the firms tend to be smaller, essentially engineering- and research-oriented companies found in such places as California's Silicon Valley and the high-tech Route 128 corridor encircling Boston.

Lior Bregman, a defense specialist with Oppenheimer & Co. Inc., notes that the ``jury is still out regarding the long-term impact'' of the Gulf crisis on the defense electronics industry. That depends on the duration and scope of the war, he says. Based on preliminary results, Mr. Bregman says ``long-range prospects will be considerable.'' Short-term prospects, based on the need for replacement weapons, will probably benefit a number of companies, such as Raytheon, the system integrator for the Patriot missile, and Martin Marietta, which produces the missile.

Dennis Jarrett, a market analyst for Kidder, Peabody & Co., concludes in a recent study that among all the major stock sectors, the defense electronics sector continues to post strong leadership within the broader market. Moreover, one stock sector that has some defense-related characteristics, semiconductors, is becoming what Kidder Peabody calls an ``emerging performer.''

Recommended: Default

It's important to note the distinction between defense electronics firms and defense firms in general. Reason? The overall defense budget, according to economic consulting groups such as DRI/McGraw-Hill in Lexington, Mass., is expected to continue to fall, irrespective of what happens in the Gulf. That's largely a result of the reduction in tensions between Washington and Moscow.

As evidence of that broader trend, analysts note that the Pentagon's procurement budget for fiscal year 1991 was cut some $19 billion, down to $67 billion. Major weapons systems continue to bite the dust, including the $45 billion P-7A antisubmarine plane program, which was scrubbed last July after Lockheed didn't correct a wing problem, and the $57 billion A-12 attack plane program, canceled last month by Defense Secretary Richard Cheney. Prime contractors for the A-12 program are McDonnell Douglas Corporation and General Dynamics Corporation.

But if defense firms in general face leaner times, companies linked to defense electronics are suddenly in vogue. Firms expected to benefit from the Gulf conflict, besides Raytheon and Martin Marietta, include General Dynamics and McDonnell Douglas, which manufacture the Tomahawk cruise missile; Loral, a diversified defense electronics firm specializing in aircraft protection programs; ESCO Electronics, which makes the missile canisters and other components for the Patriot system; and E-Systems, a company engaged in intelligence gathering.

Raytheon's stock recently rose to a 52-week high. Last week Loral announced that its third quarter earnings had shot up 73 percent.

Other possible beneficiaries, Bregman says, include Stanford Telecommunications, in the space electronics business, and California Microwave, which is involved in both military and commercial satellite work, as well as intelligence gathering. Lockheed also has a large high-tech component.

One big question mark here, says Bregman, involves the Bush administration's call for stepped up funding for a modified Strategic Defense Initiative anti-missile program. The White House wants to shift SDI away from being a defensive shield oriented towards blocking a Soviet nuclear strike to a protection against ``limited ballistic missile strikes - whatever their source,'' according to President Bush in his State of the Union message last week.

Any boost in funding for SDI would benefit scores of high-tech contractors. But finding the money won't be easy, given the swelling federal budget deficit.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...