Defense Stocks Get Boost From Election Results

Contractors stand to gain as military modernizes under GOP Congress

Defense stocks are suddenly looking more attractive, thanks in part to the outcome of the presidential election, say a number of investment analysts.

Not that President Clinton especially wants big increases in Pentagon spending. Defense strategy was essentially a non-issue during the election campaign. But the reelection of a Republican Congress combined with military requests for modernized equipment, especially in new aircraft programs, make it likely that additional dollars will flow to big-ticket defense programs in the next few years, analysts say.

At the least, Pentagon budgets will run at current levels (about $265 billion) for the next few years, says retired Adm. Jack Shanahan, of the Center For Defense Information, a public-policy group in Washington. And Pentagon planners have a long tradition of shifting funds around, such as closing bases, to find money for hardware.

The Pentagon, for example, is beating the drums for a potential $300 billion modernization of the US air combat fleet, including three new combat aircraft programs. The programs are in various stages of funding. Congressional delegations and labor unions from states such as California, Washington, Missouri, Massachusetts, and Georgia are already pushing hard for the programs.

Known for anticipating trends, Wall Street is already starting to count the additional procurement dollars. The Standard & Poor's aerospace/defense index is up 22.32 percent through Oct. 31, well surpassing the 16.63 percent gain in the broader S&P 500 stock index, including dividends reinvested. The aerospace/defense index is made up of Boeing Company, General Dynamics Corp., Lockheed Martin Corp., McDonnell Douglas Corp., and Northrop Grumman Corp., five of the top guns of the US defense establishment.

Mergers and consolidations also continue to boost defense-company earnings. Case in point: General Dynamics, which announced last week that it was buying two military divisions from Lockheed Martin for $450 million, said it will make sales of $500 million from the units this year and "significantly higher" sales in 1997.

Compared with other large-company industrial stocks, defense-related companies are starting to look "very attractive," says Joseph Campbell, defense analyst at Lehman Brothers Inc. in New York.

"I would be very surprised if the procurement and R&D [research and development] portions of the defense budget didn't get additional funding in the next few years," he says.

Part of the reason, Mr. Campbell says, is that the American public is increasingly reluctant to send troops into situations where serious casualties might occur. As a result, the Pentagon wants more "smart weapons," such as sophisticated aircraft and ground and air missiles that can keep hostile action off in the distance, away from US forces.

"If we're going to have wars where our guys are not supposed to get hurt, we're going to have to buy more" high-tech equipment, Campbell says.

Analysts see three types of defense companies benefiting during the next few years:

*Large aerospace contractors, including Boeing, Lockheed Martin, and Northrop Grumman.

*Defense-electronics firms, such as Raytheon, and Texas Instruments, and Motorola.

*Subcontractors for larger firms.

The high-tech defense sector, involving electronics, communications, and satellites, is "riding an underlying trend that is very attractive," says Wolfgang Demisch, defense analyst at Bankers Trust Company in New York.

Defense companies can be purchased as individual stocks or through mutual funds focusing on technology or heavy-industry firms.

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