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Standard & Poor's has released its six months forecast for the Aerospace & Defense Industry, recommending investors caution regarding defense companies for the near term, the war on terrorism and concerns in the Middle East notwithstanding. The leader in global financial research and investment analysis says that the current military action in Afghanistan will not necessarily lead to outsize long term earning growth and return on capital for defense contractors. The forecast is part of Standard & Poor's Industry Survey on Aerospace and Defense, a study produced every six months by the firm's senior equity analysts. Standard & Poor's Industry Surveys series keep a watchful eye on 52 US industries, offering insights into trends and conditions that affect leading companies' market performance.
The Industry Survey for the Aerospace and Defense Industry looks at the issues affecting all segments of the aerospace and defense industry, including: the commercial aircraft market (large jet, regional jet, small jet and business jet segments) and the impact for airframe manufacturers such as Boeing and General Dynamics; the impact of procurement reforms on defense companies cash flow and ROE; and the challenges ahead for the space industry after the '90s boom that was fueled by the telecommunications industry investments in satellites.
"The defense industry's demand drivers are much more volatile than is widely believed, and increased domestic pressure for spending on social issues means that we are not likely to see Congressional approval of new, outsized Pentagon spending programs," said Robert Freedman, CPA, Standard & Poor's Aerospace & Defense analyst and author of the survey. "Adding to this constraint, many of the defense projects which are poised for approval, like missile defense, are lower-margin, R&D programs for contractors," he continues. "These factors could materially hamper earnings growth for pure-play defense companies like Lockheed-Martin, Northrop-Grumman and Raytheon. Given current prices, investors in defense stocks may be setting themselves up for disappointment down the road."
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