Wednesday, October 29, 2008

The Financial crash and leading Defense Manufacturers

The challenge to the world's financial system with a crisis in liquidity seemed to potentially leave the leading defence industrial players largely unaffected. In late 2007 investment banks analysts were forecasting defense as being one of only three sectors to post positive growth in 2008.

The recent late summer and early autumn slump in the markets has pierced the shield of apparent invulnerability of leading defense stocks. Below is a summary of what has transpired:

Company 52 week share price Mkt. Cap P/E
Boeing (BA) $39.99 - $98.71 $36.5bn 9.8x
General Dynamics (GD) $51.90 - $95.13 $23.1bn 9.7x
Lockheed Martin (LMT) $72.40 - $120.30 $31.5bn 10.2x
Northrop Grumman (NOC) $37.23 - $85.21 $14.7bn 9.0x
Raytheon (RTN) $41.81 - $67.49 $19.7bn 10.8x

In terms of share price variation, the top 5 US contractors have experienced an average fall of nearly 50% in the past 52 weeks. Of the top 5 Boeing, experiencing difficulties with the Air Tanker contract for the USAF as well as labor difficulties with the unions has suffered the steepest fall. Raytheon and Lockheed Martin have weathered the battering storm of share prices best.

Company 52 week share Mkt. Cap. P/E
BAE Systems (Lon:BA) £2.94 - £5.19 £11.1bn 10.2x
Babcock (Lon:BAB) £3.06 - £6.50 £-- --.-
QinetiQ (Lon:QQ) £1.56 - £2.35 £1.04bn 21.9x
VT Group (Lon:VTG) £4.32 - £7.24 £-- --.-

Whilst some in the Defense establishment who feel less well disposed to the idea of profitability of defense contractors, the current pinch in the credit markets, coupled with falls in valuation will make it harder to secure finance for investment in their businesses, product development and so forth. Furthermore weakness in the industry will reinforce pressure to merge or acquire smaller competitors - with less choice for the end customer and less competition.

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