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Budget lifts defense titans
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February 1, 1999: 5:19 p.m. ET
Shot down in '98, Lockheed, Northrop shares spike as Clinton airs '00 budget
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NEW YORK (CNNfn) - The defense-friendly budget presented by President Clinton Monday helped lift shares of two top defense contractors that have been in Wall Street's dungeon in recent months.
Vaulting upward were Lockheed Martin (LMT) and Northrop Grumman (NOC) -- two stocks recently seething in a netherworld of investor disinterest after they pulled the plug on a planned $10 billion merger last year.
But the budget, analysts said, fired up the afterburners behind the stocks again: Northrop soared 5-5/8 to 62-5/8, or 9.9 percent, while Lockheed added 1-3/4 to 37, or 5 percent.
Shares of both Northrop and Lockheed companies plunged last year, in part due to the dissolution of the merger after the government called for more divestitures than the firms would agree to make.
But fundamental reasons also were to blame.
"We missed earnings for the year," said James Fetig, a Lockheed spokesman, referring to the company's inability to meet analysts' earnings forecasts for the slump last year. "Our stock is currently in the penalty box."
Early Monday, President Clinton unveiled a $1.77 trillion fiscal year 2000 budget likely to delight many in the defense industry, by calling for the first year-over-year increase in military spending since the mid-1980s.
Asked why shares at both Northrop and Lockheed rocketed higher, SG Cowen analyst Cai Von Rumohr said: "I assume part of it has to do with the budget."
The budget would lift defense outlays to $333 billion annually by 2005, starting with a 1.7 percent increase from '98 levels to $280.8 billion this year.
In the fine print, the budget proposes $53 billion for a weapon-systems modernization programs, an increase of $4 billion over fiscal 1999
That arms modernization included building 36 F-18E/F fighter jets made by aerospace giant Boeing (BA). For Lockheed, the budget calls for 10 additional F-16 fighters and six extra F-22 "stealth" fighters -- which Fetig said is one of the nation's most expensive fighter programs at about $70 million per plane.
"We are pleased that a large number of our programs were supported," he said.
Northrop is the prime subcontractor on the F-18 and the Boeing C-17 transport program, a top beneficiary of the hike in defense spending. The Pentagon wants a total 134 C-17s, with a purchase of 15 in fiscal 2000 for $3.56 billion.
Boeing, which is primarily a commercial aircraft maker, was unable to translate those budgetary outlays into a stock-price climb on Monday: its stock fell 5/8 to 34-1/16.
Northrop is expected to report its fourth-quarter earnings Wednesday. The consensus analyst target, as compiled by earnings tracker First Call Corp., is for Northrop to report 75 cents a share.
Both Lockheed and Northrop got a boost from PaineWebber analyst John Modzelewski, who upgraded Northrop Grumman to a "buy" from a "neutral" and reiterated his "attractive" rating on Lockheed on Monday.
-- from staff and wire reports
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