NEW YORK (CNNfn) - Wall Street analysts say it doesn't matter whether Republicans or Democrats triumph in this year's elections, defense stocks are still poised to be winners.|
"No matter who shows up as president will recognize there's some need for some increase in defense spending," said Howard Rubel, analyst for Goldman Sachs.
"There's a potential for somewhat higher growth than current plans. At a minimum, the defense budget could grow 3 to 5 percent annually for the next five years."
Indeed, even under current Clinton administration projections, spending on procurement is set to rise 38 percent from fiscal year 2000, which ended last week, to fiscal year 2005. And the candidates are both pledging to accelerate that increase.
Wall Street analysts said that despite tough talk from Republicans about the need to beef up the military and deploy a missile defense system, they don't believe there will be much difference between the administration of Al Gore or George W. Bush in terms of Pentagon procurement expenditures.
"What Wall Street thinks is that Bush would be slightly better than Gore, but not much, and either way the numbers are going up," said Joseph Campell, analyst with Lehman Brothers.
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Some experts even believe that the defense contractors would be better off under Gore than Bush.
Gore spending plan favors contractors
Loren Thompson, chief operating officer of the Lexington Institute, a conservative think tank that focuses on defense systems and policy, said Bush's stronger support for a strategic missile defense system could drain resources from weapons systems closer to deployment. Gore also supports work on the project, but has not made it a priority as has Bush and many congressional Republicans.
"Because Gore doesn't show great enthusiasm for missile defense, he's not going to initiate another big program that has to be fit into a tight program," Thompson said. "That's probably a net positive for contractors."
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Thompson said that even without a difference on missile defense, Gore's campaign proposal on defense spending is better for contractors than Bush's proposal. While Bush strongly favors increasing military pay and readiness preparation, that kind of spending has little if any impact on defense contractors, Thompson said. Gore's proposals call for more money on weapons and systems.
"Military contractors don't necessary make more money when overall military spending increases, they make money when procurement goes up," Thompson said.
"So far the Democrats look like better news for the defense industry than the Republicans," Thompson added. "I don't see how anyone could disagree. The Democrats are on the record wanting to spend more money than Bush does. The Gore plan envisions spending $10 to $11 billion more a year on defense, whereas the Bush plan sees half as much (of an increase)."
Still Bush and his vice presidential candidate Dick Cheney, a former defense secretary, have been hammering Gore as weak on defense.
"I can look at the data generated by the Defense Department itself: some 40 percent of our Army helicopters not combat ready, the fact that money is now being drained out of the procurement budget to support a lot of the deployments overseas, the fact that the force has gotten as small as it has," Cheney told CNN's Larry King Live program earlier this week. "Clearly, some reductions were justified with the end of the Cold War. But we have gone way beyond that now."
Wall Street analysts remain unconvinced either side would be a boom or bust for defense contractors.
"I don't think there's a whole lot at stake," said Chris Mecray, analyst with Deutsche Banc. Alex Brown. "The Republicans are clearly more vocal about supporting defense, more vocal about specific issues. But there's no reason to assume the Democrats are bad for defense. It's not supported by hard facts."
Analysts say it is a popular misconception that Republicans are better for defense contractors' stocks than Democrats.
"The stocks were better performers during the Clinton administration than they were during the Bush period," said Goldman's Rubel. "The stocks actually performed well in the second half of the Carter administration. And in the whole second term of Reagan administration they were pretty awful."
Earnings per share for top defense contractors such as Lockheed Martin Corp. (LMT: Research, Estimates), Raytheon Co. (RTN.A: Research, Estimates), Northrop Grumman Corp. (NOC: Research, Estimates) and Boeing Co. (BA: Research, Estimates) are forecast to rise between 20 and 50 percent over the next two years by analysts surveyed by First Call.
The reason for analysts' optimism lays partly in the way military spending is approved by Congress - budget authority often comes years before the actual spending takes place due to the time it takes to construct some of the weapons and systems.
"After enduring 13 years of budget declines, we've had three years of budget authority growth, but no cash outlay growth," said Lehman's Campbell. "Congress approved new orders that have not yet translated into new sales. The spending for that is about to begin next year. We're at very beginning of what should be a long but not rapid rise."
Defense industry political donations are leaning hard in favor of Bush, as are donations from virtually all industry groups outside of entertainment and trial lawyers. But they're not putting much financial muscle into the campaign so far.
According to the Center for Responsive Politics' analysis of campaign contribution records to date, the defense industry has given $138,475 to the Bush campaign. While that's about four times the amount it's given to Gore, it's only about 5 percent of the donations from energy and natural resources companies, and less than 1 percent of the donations from finance, real estate and insurance firms.
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