By Graham Warwick in Washington, DC and Helen Massy-Beresford in London
US defence companies are riding high on the back of growing spending for the war in Iraq, but how long can the mood of optimism last?
Major defence contractors have posted an overwhelmingly bullish set of first quarter results, and the Spade defence index has risen over 13% since the start of the year, but the future looks rosier for some contractors than others.
The first of the US government’s influential congressional subcommittees has recently completed its mark-up of the 2007 defence budget and increased defence spending by $3.8 billion, but funds have been shifted away from long-term purchasing to near-term programmes tied to fighting the war in Iraq. Programmes like the Joint Strike Fighter and Future Combat Systems may lose out, while the manufacturers of products being used on a daily basis in Iraq, like Abrams tanks and Bradley armoured fighting vehicles, stand to gain. General Dynamics saw an 11% increase in net earnings for the quarter, to $374 million.
As far as aerospace manufacturers go, Boeing, with its AH-64 Apache and CH-47 Chinook, and Bell and Sikorsky with their OH-58 and UH-60, respectively, are likely to benefit from maintenance revenues as the conflict continues as their helicopters are used by the US Army.
Sikorsky’s parent company UTC is forecasting full-year revenues of around $46 billion compared with $42.7 billion last year. Meanwhile, Textron, which owns Bell Helicopter, boosted its earnings per share for the first quarter of the year to $1.19 per share, compared with $0.61 per share for the same period a year earlier.
Elsewhere, a strong performance in the civil sector benefitted Boeing. The manufacturer’s first quarter earnings were boosted by 40% year-on-year to $959 million, thanks to a record number of commercial aircraft deliveries. The division’s revenues were up 48% to $7.1 billion. But the company’s Integrated Defense Systems unit also performed well, with a 6% increase in revenues to $7.2 billion. But Boeing’s decision to cut military jobs at its facility in Wichita shows that even high defence spending, coupled with healthy revenue growth, is no guarantee of work for the primes.
Honeywell posted a strong 12% increase in sales for the quarter, with the aerospace division’s revenues growing by 5% to $2.63 billion. But strong growth in civil sales masked a slight decline in revenues for defence and space products.
Northrop Grumman was the only major defence contractor reporting a year-on-year dip in overall revenues for the quarter (see graph), as it continued to suffer from the effects of Hurricane Katrina on its shipbuilding operations. But its aerospace division saw a 7% increase in sales to $2.3 billion. Higher volumes on F/A-18, F-35, E-2C Advanced Hawkeye, and E-2 Post Multi-Year procurement programmes in the company’s Integrated Systems division offset a 1% decrease in the Space Technology division.
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Manufacturers of airlift capability have a secure future with the army and air force’s launch of the Joint Cargo Aircraft programme and the USAF’s requirement for more Boeing C-17s and Lockheed Martin C-130Js to replace older aircraft.
As the war continues, the question is whether more funds will be directed towards companies that provide products and services rather than systems, and weapons rather than platforms. Defence electronics sales boosted results at L-3, which posted consolidated operating income for the 2006 first quarter 44.8% higher than the same quarter a year earlier at $288 million.
Further ahead, there is a risk for programmes like the JSF which are not a priority for fighting the war in Iraq. However, there is a light at the end of the tunnel with the confirmation of increased funds for the alternate engine and funds to buy F-22s in 2007, although the total number to be bought remains stable. And conversely, cuts to F-22 numbers and JSF delays could result in upgrades for in-service Boeing F-15s and Lockheed F-16s and even the possibility of further purchases of these aircraft. Lockheed Martin saw a 60% jump in net earnings for the quarter, to $591 million. However, within the group’s aeronautics division, net sales dipped 3% because of a smaller number of C-130J deliveries which a higher volume of combat aircraft deliveries failed to counter.
Longer term, as the end of the Bush administration approaches, analysts predict that defence company stocks could start to suffer, as investors anticipate a reduction in defence spending. In the meantime, US defence contractors are doing well and money will continue to be spent as long as the conflict continues. But companies may have to think about adjusting their portfolios to ensure they put the right emphasis on the equipment needed in Iraq.
Source: Flight International
