Defense stocks hit new highs

Associated Press - Sept 26, 2007

WASHINGTON (AP) - Defense stocks on Wednesday hit new highs ahead of Defense Secretary Robert Gates' visit to Capitol Hill to request roughly $45 billion in additional funding to cover military costs in Iraq and Afghanistan in 2008.

The AMEX Defense Index, which tracks 14 major defense company stocks, rose 14.25 to a high of 1,686.72 in afternoon trading. Since last year, the index has risen roughly 47 percent, outperforming the broader S&P 500 index, which has climbed nearly 15 percent over the same period.

Although the anticipated request for more funding does not come as a surprise to Wall Street, the Pentagon's message nevertheless reinforces the idea that defense spending will remain high in the near-term, said Myles Walton, a CIBC World Market Corp. analyst.

Gates and Peter Pace, the soon-to-retire chairman of the Joint Chiefs of Staff, are scheduled to testify before the Senate's appropriations committee at 2 p.m. EDT.

In early afternoon trading, shares of Lockheed Martin Corp. (NYSE:LMT) on Wednesday led the sector with the largest gain, adding $1.62, or 1.5 percent, to $106.58, nearing its all-time high of $107.33 reached in July. Shares have traded between $82.70 and $107.33 over the last 52 week period.

Shares of Raytheon (NYSE:RTN) added 66 cents to $64.38, after briefly touching a new high of $64.42, while General Dynamics Corp. (NYSE:GD) stock added 84 cents to $85.14, retreating slightly from a new high of $85.19 posted earlier in the trading session.

The additional funding combined with prior requests made in the president's fiscal 2008 budget would bring the total funding to about $190 billion compared with the $165 billion approved by Congress for 2007.

Wall Street and industry executives have sought to assure investors there will be little disturbance in military spending over the next several years -- regardless of who succeeds President Bush in the White House.

Walton said in a recent note to clients that the Pentagon is unlikely to experience a reduction in spending in the fiscal 2009 budget, adding that the fiscal 2010 budget would be the first opportunity for any drawdown in war-related spending. If that's the case, contractors' financials won't be affected until 2011, at the earliest, Walton said.

Bank of America (NYSE:BAC) analyst Robert Stallard said he expects war-related spending in fiscal 2009 and fiscal 2010 to be $170 billion and $150 billion, respectively. And even after the peak, war spending is still likely to be more than $100 billion annually for the next few years to refurbish and replace war torn equipment used in Iraq.

An additional buoy for defense companies is another anticipated record year in foreign military sales.

While this year's results are slightly off pace from 2006 export sales, a $20 billion Middle East arms package peddled by the Bush administration will help to elevate arms exports by large-cap defense companies like Raytheon Co., General Dynamics and Northrop Grumman. (NYSE:NOC)

Defense exports, on average, account for 10 percent to 20 percent of defense companies' arms sales. However, because of the unpredictable nature of international sales, they are often excluded in company guidance.

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