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Defense Stocks Soar, Led by Electronics Firms

NEW YORK — Shares of defense contractors rose on Monday, led by makers of military electronics systems, as investors bet on an increase to defense spending following Tuesday's attack on the World Trade Center and the Pentagon.

Engineered Support Systems Inc., Raytheon Co. and L-3 Communications Holdings Inc. gained more than 20 percent each.

Traditional names in the defense industry climbed as well, with Lockheed Martin Corp., Northrop Grumman Corp. and General Dynamics Corp. adding more than 10 percent.

"The terrorist attack on America is a major watershed event likely to bolster U.S. weapons spending, buttressing already solid earnings prospects for most defense contractors," said Cai von Rumohr, analyst at SG Cowen. "Given the heightened perception of threat and eroding cyclical prospects, defense stocks appear positioned for a broad and vigorous trading upswing."

Earlier Monday, SG Cowen upgraded its investment rating on Raytheon to "trading buy" from "hold," and named Northrop and L-3 as top picks.

Gains among defense stocks came as the broader market struggled in its first session since Tuesday's attack. The blue-chip Dow Jones industrial average fell 5 percent while both the S&P 500 and the Nasdaq composite index lost more than 4 percent.

NOT JUST THE SAME NAMES

Wall Street analysts noted military electronics companies were likely to be clear winners as the U.S. government prepared to strike back against what it has dubbed "terrorist acts."

"We expect the natural reaction by investors will be to buy the defense contractors in the belief that we will see increased defense spending," said Sam Pearlstein, analyst at First Union Securities. "However, it should also become increasingly clear that many of the weapons the contractors currently build might not be the best ones for fighting terrorism and the enemies of today."

First Union highlighted the ISR, or intelligence, surveillance and reconnaissance, area, along with precision weapons, defense electronics, and nuclear, biological and chemical defenses, as groups likely to see higher spending.

In line with those views, shares of Alliant Techsystems Inc., a leader in munitions and precision capabilities, jumped 23 percent, or $15.09 to a new year high of $80.38.

Engineered Support Systems, maker of electronics and military support equipment, surged 33 percent, or $10.48 to $41.53. The stock was the leading gainer on the Nasdaq.

L-3, which supplies secure communications and specialized products to prime contractors in the aerospace and military industry, saw its stock gain 33 percent, or $21.16, to $84.16.

Raytheon, a leader in defense electronics and maker of the Patriot missile, also stands to gain from a boost in spending on warfare technologies, analysts said. The stock surged 21 percent, or $5.35, to $30.20.

Traditional names in the defense industry posted substantial gains as well. Shares of Northrop, maker of the B-2 bomber and Global Hawk unmanned surveillance plane, were up 16 percent, or $13.16, at $95.10, and No. 1 contractor Lockheed, maker of fighter jets, were up 12 percent, or $4.84, at $43.15.

Some analysts, however, noted that the upswing may be temporary. Christopher Mecray, of Deutsche Banc Alex. Brown, said he expects anti-terror action on the part of the U.S. government to be manpower-intensive rather than equipment-intensive, which limits benefits to the defense contractors.

-- Anonymous, September 17, 2001