US stocks: Wall St gauges war effect on firms

10.30am

NEW YORK - With the war in Iraq nearing an end, Wall Street analysts have already begun placing bets on the defence contractors that will benefit from higher sales after their weaponry was used to end Iraqi President Saddam Hussein's regime.

But for every defence bull, there are others who caution the sluggish US economy remains the biggest threat - victory or no victory in the Gulf. In the end, analysts say, the war in Iraq may have only a small role, if any, to play in what happens to defence sector stocks. If the economy remains sluggish, so will defence spending.

"It was a short war -- only three weeks, and that's good for the defence sector," said Robert Stallard, aerospace and defence analyst for Banc of America Securities in London. "But we haven't moved out of the bear market. Economic data is still weak."

Some analysts say that missile makers could see a boost in profits and share price after early reports suggest systems such as Lockheed Martin Corp.'s Patriot PAC-3 missiles were mostly victorious in knocking down enemy projectiles.

Early indications suggest the PAC-3 hit-to-kill weapons intercepted at least 10 Iraqi missiles. That was good news to some after an early version failed to intercept the majority of its targets during the 1991 Gulf War.

But some jitters about the missile linger after a Patriot shot down a British RAF Tornado jet, killing two crew members, and another may have downed a US F/A-18 Hornet. However, analysts noted it was still unclear whether the problem stemmed from the missile, or a problem with the plane's encrypted "identification friend or foe" system.

Additional spending to replace munitions could benefit Tomahawk cruise missile maker Raytheon Co and ammunition maker Alliant Techsystems Inc, according to J.P. Morgan Chase & Co. aerospace and defence analyst Joe Nadol.

Reduced threat equals reduced demand

Makers of heavy ground equipment, such as M1 tank contractor General Dynamics Corp, could also benefit after military planners see the important role infantry vehicles played in the war, according to Merrill Lynch analyst Byron Callan.

But despite early hopes that defence spending will rise after a victory in Iraq, others caution that the triumph will have some unexpected consequences for arms spending. For one, stability to the region will diminish the need for such munitions outside the United States.

"There was a big burst in the last Gulf war because we didn't finish the problem (of deposing Saddam)," said James Lewis, senior fellow at the Centre for Strategic and International Studies, a Washington think tank.

"This time we've reduced the threat in the region and that's going to reduce demand."

And while Asia might be a burgeoning market for military wares, the Pentagon may not want potential customers there to get their hands on the latest US technology.

"If there's going to be an arms race, it'll be in Asia," Stallard said. "The US could dominate that market, but there's a question if they want to supply countries they may not necessarily trust."

And finally, the cloudy economic outlook remains the biggest obstacle to strong growth for defence contractors. Much depends on spending by Corporate America and consumers.

"Poor first-quarter earnings could very well take the wind out of our sails," Stallard said.