Armaments And Investments

Stock in Niche Defense Firms Soars in Wartime

Bullets, trucks and armor -- the meat and potatoes of the defense industry -- are back in fashion.

After years of holding second rank to expensive, futuristic programs -- from $300 million fighter jets to robots -- the essentials have been pushed to the forefront by the wars in Iraq and Afghanistan. And that has proved good news for the stocks of companies that replenish the weapons, trucks and helicopters that see frontline action. They are among the best performers this year, analysts say.

The Iraq war may be politically unpopular, but it has been a boon for the defense industry. Last year, the sector soared 27.7 percent, while the Standard & Poor's 500-stock index rose 13.6 percent. So far this year, the industry has gained 26.7 percent, compared with the S&P's 9.5 percent increase. Since 2001, defense stocks that make up the S&P Aerospace & Defense Select Industry Index have climbed 181.7 percent; the broader market is up 17.6 percent.

But it's the niche companies, such as the makers of armored vehicles, that are the top individual gainers this year, according to the Spade Defense Index, which tracks the sector.

"Clearly anything that is still related to the war in Iraq and Afghanistan is the hottest market right now," said Byron Callan, an independent industry analyst.

Among the hottest products is the Marine Corps' newest mine-resistant vehicle. The program for the vehicles -- which cost about $1 million each -- has ballooned over the past few months to a potential $20 billion from $8 billion, lifting prospects for the vehicles' manufacturers. The military is seeking the vehicles because it thinks they can better protect troops from roadside bombs, the biggest threat to service members in Iraq.

The makers of these vehicles, including Force Protection and Oshkosh Truck, recently emerged as winners in the House version of the 2008 defense authorization bill. The administration had requested $400 million to help fund production. The House approved $4 billion. Force Protection stock is up 31percent this year, and Oshkosh has gained 34 percent.

A highly critical report from the Pentagon inspector general didn't hurt Force Protection's stock. Last week, the inspector general's office said Force Protection was slow to deliver on contracts, but the company's stock finished up Thursday after release of the report.

The larger defense industry isn't exactly suffering from the attention given to the niche players. The big weapons makers have continued to soak up huge Pentagon spending and have expanded their international business. Military spending is on target to reach $624.6 billion in fiscal 2008, including more than $100 billion in war supplemental outlays, according to a report by the Center for Strategic and Budgetary Assessments on June 7. At those levels, the flow of military funds would be the highest in real terms since fiscal 1946, the report said.

Among big defense contractors, Lockheed Martin stock has gained 6.7 percent this year, General Dynamics has climbed 9 percent and Raytheon is up 4 percent.

Analysts caution that the huge outlays that have propped up the big defense companies may not continue. "It just seems there is a ceiling we're going to hit here. It is not like DOD is behaving like it's blue skies forever," said Callan, the independent industry analyst.

In fact, the House authorization bill shaved more than $800 million from Boeing's Future Combat Systems. That huge Army modernization project includes new tanks and equipment that will not be ready for several years.