FOOL PLATE SPECIAL
The war on terrorism is likely to result in increased defense spending, and companies in the defense industry were some of the few that went north when the markets went south this week. Here, we quickly profile five of the biggest names in the industry: Lockheed Martin, Raytheon, Northrop Grumman, Boeing, and General Dynamics.
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It has certainly been an interesting week for the defense industry. When trading resumed on Monday, just about every company in the industry saw its stock gap significantly higher as investors figured the newly declared war on terrorism would eventually lead to increased defense spending, translating directly to increased sales. Consolidation has been the name of the game in defense over the last decade, and the industry is now dominated by a few enormous companies. Given the increased investor interest in the industry, it seemed a good time for an industry primer with thumbnail sketches of some of the companies that now loom over the industry. Lockheed Martin Lockheed is in the midst of a restructuring after having a terrible 2000 profit-wise. After realigning itself and spinning off several non-core businesses, Lockheed appears to be on the right track. The company is expected to earn $1.71 per share next fiscal year, which puts it trading at about 25 times forward earnings after this week's 15% rise in the stock. Raytheon Raytheon is on track to have just over $16 billion in sales this year. Following a few discontinued projects, analysts expect the company to have $1.76 in earnings per share next year. Even after going from below $25 before the attacks to $33 at this writing, Raytheon is only trading at about 19 times forward earnings. Northrop Grumman The company is on track to have over $15 billion in sales after integrating Litton's business lines, its first year of sales growth since 1997. The bottom line has certainly looked better than the top, and the company has significantly improved its profit margins. Analysts now expect the company to earn $6.46 per share next year, putting the stock at about 15 times forward earnings estimates even after seeing its stock jump over $13 from the $82 it traded at before the terrorist attacks. Boeing Among other things, Boeing makes the F/A-18 and F-15 fighters as well as the C-17 transport and the Apache helicopter line. Though the rest of Boeing is taking a well-publicized hit thanks to the anticipated post-attack slowdown in the commercial aircraft industry, Boeing's $13 billion military business could very well see an uptick in the coming months. General Dynamics In an attempt to diversify away from defense, General Dynamics recently acquired business jet maker Gulfstream. Now, however, it looks as if the company's defense business is likely to see increased investor interest and an increased order backlog from Uncle Sam. General Dynamics has been an extremely consistent performer financially, profitable each and every year in the last decade while roughly tripling both sales and profits since 1996. On over $12 billion in sales, the company is expected to earn $5.21 next year, putting the stock at about 16 times forward earnings at this writing. Do your homework! That said, for investors who want to dig a little deeper, there are several in the industry that are creating copious amounts of cash flow while their stocks are at very reasonable valuations. The industry is certainly worth investigating further. Paul Larson owns shares in General Dynamics, and you can see the rest of his stock holdings online. The Motley Fool has a progressive disclosure policy.
Formed by the 1995 merger of Lockheed and Martin Marietta, Maryland-based Lockheed Martin (NYSE: LMT) is the largest pure-play defense company with annual sales near $22 billion. Lockheed is perhaps best known for its F-16 and F-22 fighters and for its C-130 transports, but the company has its fingers in just about every segment of aerospace defense, including satellites, missiles, and aircraft control. Though some of its communications systems are sold for commercial purposes, sales to the military reign supreme at Lockheed with roughly 70% of sales coming courtesy of Uncle Sam.
Remember the Patriot missiles used to shoot down the Iraqi "Scuds" during the Gulf war? Raytheon (NYSE: RTN) was behind those missiles. The company also makes Beech and Hawker jets, but electronic imaging, command control systems, and related services make up the bulk of Raytheon. Roughly two-thirds of sales are directly to the Defense Department.
Northrop Grumman's (NYSE: NOC) claim to fame is its involvement in the stealth program, but the company is one of the most integrated defense companies on the planet. After recently acquiring Litton industries, Northrop not only makes planes but also ships, including amphibious assault craft, for the Marines and Navy. Electronic systems and military information technology are also major business lines of Northrop Grumman.
Boeing (NYSE: BA) may be best known for its commercial aircraft, but the aerospace giant is also a major player in the defense industry. Just over 20% of the company's sales are related to military products, much of this business coming courtesy of Boeing's 1997 acquisition of McDonnell Douglas.
While the first few companies listed here are primarily involved in aerospace defense, General Dynamics (NYSE: GD) aims to be king of the ground and seas. The company is America's largest maker of nuclear attack submarines, destroyers, and tanks. Trying to solidify and essentially monopolize its position within the nuclear marine business, the company is attempting to acquire rival Newport News Shipbuilding (NYSE: NNS), but the merger is anything but a done deal with Northrop Grumman trying to play spoiler by putting in a hostile bid for Newport.
With any company, it is important for investors to do their homework and not just "buy the story." Though the war on terrorism is indeed likely to result in increased defense spending, not all companies in the industry are created equal.
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