Defense spending shift to weigh on 2010 outlooks
Major U.S. defense contractors, braced for restrained U.S. spending and higher pension costs, are likely to forecast flat or slow growth for 2010, while commercial aerospace firms could offer more evidence that economic conditions are firming.
Companies such as Lockheed Martin Corp
I think (guidance) will be pretty flat, said Paul Nisbet, an analyst with JSA Research.
Investors are concerned that the defense sector, which saw spending ramp up during the Bush administration, will stall for the next few years as President Barack Obama cuts traditional weapons programs and devotes more funds to fighting insurgents and beefing up security networks.
There is a real shift going on toward the cyber-war world and the magnitude of that shift and the importance of it, I don't think is yet appreciated, said David Fitzpatrick, managing director and co-leader of the Americas aerospace practice for AlixPartners.
He said companies that develop new technologies and can provide cybersecurity services stand to gain from future defense spending, while those tied to Cold War-style weapons will find new contracts elusive.
Already, Pentagon program cancellations this year have been felt. Lockheed, Raytheon and Northrop Grumman Corp
Some analysts said they expect Lockheed, the defense industry leader, to give a 2010 forecast that trails consensus Wall Street estimates because of higher pension expenses and slowing sales from programs such as the F-22 Raptor fighter jet, production of which has been capped.
Last week, Goldman Sachs downgraded L-3 to sell, saying its 2010 revenue may be flat or could decline.
I would imagine that they're all going to be conservative in trying to see through the fog that goes with this shift of focus with respect to where investment goes on which new technology, Fitzpatrick said of the coming 2010 earnings outlooks. It's going to be a confusing time for defense ... and not an era of growth.
Analysts have a brighter view of commercial aerospace companies such as Goodrich, which could be poised to gain more business as an improving economy helps airlines and plane programs such as Boeing's 787 Dreamliner eventually ramp up production.
Commercial aerospace is going to be challenged very seriously by the economy in general, Fitzpatrick said. But the good news is that the economy doesn't seem to be getting any worse, is starting to get better in a few places, and the airlines have been able to go out and recapitalize to some extent.
(Reporting by Karen Jacobs; Editing by Tim Dobbyn)
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