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U.S.-led Attacks Could Fuel More Defense Stock Gains
October 08, 2001 04:30:15 (ET)
NEW YORK/SINGAPORE, Oct 8 (Reuters) - The United States and Britain opened their arsenals on Sunday, using a bevy of U.S.-made weapons in the attack on Afghanistan, and leading Wall Street analysts expect a renewed rally in defense stocks.
Ahead of Wall Street's opening on Monday, Singapore-based ST Engineering ((STEG.SI)) pointed to positive sentiment toward the sector, by bucking a weak market to rise nearly four percent on Monday. At 0729 GMT, it had surrendered some ground but was still up six cents at S$2.08.
ST is Asia's largest listed defence contractor and it operates two hangars in the United States that service aircraft.
"The market is really quite cautious and overall market volume is thin. But ST Engineering is seen as benefiting as it is a defence stock," said a dealer with a Singapore brokerage.
Investors anticipated a U.S. military response to the September 11 attack on the United States, and boosted shares of defense contractors accordingly.
While the stocks rally was weighted toward makers of military electronics, the start of actions against Afghanistan could spark wholesale buying, they said.
"Defense stocks are easy -- they'll go up," said Phil Orlando, chief investment officer of Value Line's Asset Management division, referring to U.S. stocks.
"Most of these stocks shot up significantly right with the attacks a couple weeks ago, which is exactly what you'd expect," he said on Sunday. "That wouldn't discount the fact that the stocks would probably rally further given the initiation of our military activity."
LAND, SEA-BASED WEAPONS
Both land and sea-based weapons, along with aircraft and cruise missiles, were employed in the strikes, a senior military official said. Among those, 15 U.S. bombers, 25 strike aircraft and 50 cruise missiles were used, the official said.
Northorp Grumman Corp (NOC,Trade), maker of the B-2 stealth bomber and a leader in electronics and surveillance technology, saw its stock jump more than 30 percent since Sept. 11.
Other bombers said to be used in the attack -- the B-1 and the B-52 -- are made by Boeing Co (BA,Trade). The B-52 Stratofortress is a long-range heavy bomber that can carry nuclear or precision-guided weapons. The B-1 Lancer is a heavy bomber capable of flying at speeds of Mach 1.2 at sea level.
Boeing's stock, however, has been pressured by its exposure to commercial aerospace amid a crisis in the airline industry. Shares have fallen more than 16 percent since September 11.
MISSILES BUILT BY MANY
Cruise missiles are built by a number of companies. The term covers several vehicles and their capabilities but most often refers to missiles such as the U.S. Advanced Cruise Missile, which can fly to ranges of up to 3,000 km.
The Tomahawk cruise missile, designed to fly at low altitudes at high subsonic speeds, is built by Raytheon Co (RTN,Trade). It is used by both the U.S. and British militaries and considered difficult to detect due to its small radar cross-section and low flight.
Shares of Lexington, Massachusetts-based Raytheon, which also makes the Patriot air and missile defense system, have gained nearly 41 percent since September 11.
Israeli company Rafael Armament Development Authority designed the AGM-142 precision guided, medium range, air-to-surface missile -- fielded on the B-52 in 1992.
Lockheed Martin Corp (LMT,Trade), the nation's No. 1 defense contractor, produces Fleet Ballistic Missiles.
Its Trident II D5, a submarine-launched ballistic missile with a range of more than 4,000 nautical miles, may have been used in the attack. British Prime Minister Tony Blair said submarines had launched missiles at Afghanistan on Sunday.
Lockheed also builds the F-16 fighter jet. McDonnell Douglas, now part of Boeing, built the F-15 tactical fighter.
Shares of Bethesda, Maryland-based Lockheed have climbed 25 percent since September 11.
CONTRACT HOPES PREMATURE
Despite Monday's gains for Singapore's ST Engineering, however, the stock is down about 11 percent since September 11.
Expectations ST Engineering could secure new military contracts as a result of the U.S.-led war on terrorism were also premature, analysts in Singapore said.
The outlook for ST, which has been diversifying into civilian aircraft maintenance, remains cloudly with the severe downturn in the U.S. aviation industry, and analysts say they hope to get a better handle on the outlook at the company's third quarter results briefing later on Tuesday.
BEYOND HARDWARE
After September 11, many defense industry and Wall Street analysts predicted higher spending on warfare technologies. Some noted spending could be focused on intelligence along with precision weapons and chemical defenses.
Among those analysts, First Union's Sam Pearlstein named Alliant Techsystems Inc (ATK,Trade) and L-3 Communications Holdings Inc (LLL,Trade) as leaders in important warfare areas, along with Northrop, Lockheed, Raytheon and General Dynamics Corp (GD,Trade).
Alliant Techsystems and L-3 both rallied over the last two weeks, with share prices jumping more than 35 percent.
Bruker Daltonics Inc (BDAL,Trade), maker of equipment to detect agents used in biological warfare, saw its stock rise eight percent after September 11, and analysts said the company could benefit from heightened concerns about biological attacks.
Deutsche Banc Alex. Brown analyst Christopher Mecray has noted many U.S.-led military actions could be more manpower-intensive than equipment-intensive, given actions needed to gather intelligence and conduct surveillance. But in what he called the "medium-term," the quickened tempo of military activity could ultimately demand spending on equipment.
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