CHICAGO – Defense stocks jumped higher Wednesday in what one analyst called a “relief rally” following President Bush’s re-election.
Downplaying the impact of the election, the head of Boeing’s defense unit said he still sees slower growth ahead for U.S. spending on military contracts after the surge that occurred during Bush’s first term.
Nonetheless, shares in the nation’s three biggest military contractors increased, making defense one of the strongest sectors on a bullish day on Wall Street.
Lockheed Martin Corp.’s stock closed up $1.78 a share, or 3.3 percent, at $55.89 on the New York Stock Exchange. Boeing shares increased $1.27, or 2.5 percent, to $51.15, and Northrop Grumman Corp. surged $2.10, or 4.1 percent, to $53.75. All finished near their 52-week highs.
Even after retrenching somewhat late in the trading session, the gains easily exceeded the 1 percent increase in the Dow, reflecting not only investors’ embrace of an unchallenged outcome but confidence that defense companies will get more business from a second-term Bush administration than they would have under John Kerry.
In a note to investors, Merrill Lynch defense analyst Byron Callan said he foresees cuts to the U.S. military’s modernization plans that may result in slower growth rates for those programs, affecting contractors.
“We see today’s strength in stocks as more of a relief rally than a signal of new directions for the defense sector,” he wrote.
Jim Albaugh, the head of Boeing’s more than $30 billion-a-year defense business, told analysts a slowdown in military procurement has begun despite “a great last five years” that saw defense spending rise sharply, particularly for development and technology.
“We have taken the position that regardless of whether President Bush is in the White House or Sen. Kerry was elected, we would see a moderation in defense spending in the years ahead,” he said at a Goldman Sachs conference in New York. “I think we’re starting to see a flattening of the spending on the defense side.”
Albaugh also indicated that Boeing can wait only about seven more months to land a new contract supplying the Air Force with air refueling tankers based on the 767 before deciding whether to end production of the jetliner.
“If one looks at the 767 line that we have up in Everett, we continue to get an order here and an order there,” he said. “But realistically, we need to make a decision on shutting that line down sometime in early June of next year.”
Aerospace analyst Paul Nisbet of JSA Research said Boeing has 22 767s yet to deliver and is producing about one a month in Everett – “about as slow as you can go and not lose money.”
He said Boeing, with its 767, remains the leading candidate to land a revised tanker contract.
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