Not long ago, "defense contractor" was not a polite term. Defense contractors were perceived as greedy corporations that managed to make off with billions of your tax dollars for useless high-tech weaponry at bloated prices.
But a couple of important events are causing that perception to change.
One, of course, is the war in the Persian Gulf. The idea that we could fight and win a desert war to regain vast territory in less than two months still boggles the mind. It would not have been possible without some of those expensive, high-tech weapons.
The other is that some aerospace firms well known as defense contractors have fallen into disarray. They are declining financially.
In short, defense contractors are not as assured of profits as they were just a few years ago. The defense buildups of the 1980s have diminished to a trickle. The weapons so highly touted in the war have been bought and paid for.Here are some examples. The list is by no means complete:
* Northrop Corp. was already troubled by reductions and uncertainty in the B-2 bomber program and by disappointing sales of its F-20 fighter. Now it has lost out on the contract for the Air Force's advanced tactical fighter program.
* McDonnell-Douglas, producer of the famous F-4 Phantom, the highly praised F-15 Eagle and the AV-8 Harrier, has taken big hits. The Navy canceled its Stealth fighter project. The Air Force tactical fighter project was awarded to Lockheed and others.
* Lockheed, meanwhile, has had its P-7 anti-submarine airplane contract canceled and has lost out on some smaller contracts as well. The advanced tactical fighter is a big boost.
* Rockwell International has just completed what is likely to be the last of the space shuttles. Its B-1 bomber has been plagued by problems, frequently grounded and even now cannot be flown in bad weather. The fact that the B-1 stayed home while the ancient B-52 did the job in the gulf war did not go unnoticed, producing a public relations black eye.
* Grumman Corp. manufactures the highly rated aircraft of the "cat" series -- Bearcat, Hellcat, Tigercat, Wildcat and most recently the F-14 Tomcat of "Top Gun" fame. It has been in a kind of limbo for years now.
* General Dynamics lost big with the cancellation of the Navy Stealth project but gained with as one of the Air Force's choice of contractors for the advanced tactical fighter.
Additionally, as the numbers of big-ticket defense items are reduced, the Defense Department policy of having multiple sources for the same item is likely to be cut back. It is more efficient and cheaper to keep one production line busy than it is to provide sporadic work for two.
All this may be good news for taxpayers, but it spells economic uncertainty for employees and investors. It means that defense-intensive areas of the country may have some difficulty climbing out of the economic doldrums.
As an investor, you need to look at defense contractors in a different way.
* What are the company's other sources of revenue? Many if not most defense contractors also do substantial civilian work, either directly or through subsidiaries. How big a part of gross revenues is generated by this other work?
* What is the status of the company's defense work? This is a very chancy area, because Congress can pull the rug out from under even established programs. Does the company plan to diversify?
Analysts who watch the big defense contractors say a shakeout is taking place. Investment in some of these companies could represent substantial bargains, in some others substantial risks. is unlikely that Congress or the Defense Department will be able to step in to save them.
Whatever your interest, it is a fluid situation that you need to monitor closely.