Political turmoil in Russia adds luster to defense stocks

March 26, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- Spurred on by the rocky political situation in Russia, investors are once again eyeing defense stocks after having spurned an industry that has suffered deep government cutbacks.

Although still awaiting the outcome of Russian President Boris N. Yeltsin's duel with Parliament -- which could result in impeachment proceedings beginning today -- some investors believe that the situation can only help military-oriented companies.

Regardless of the outcome, Russia's political instability could demonstrate to lawmakers that a new world order has yet to take hold as much as had been hoped. As this reasoning goes, Congress and the Clinton administration might rethink their plans to trimthe military budget and might revive contracts with defense companies.

Over the past week, many of these companies have seen their stocks increase, with prices rising for such companies as United Technologies Corp., Martin Marietta Corp., Lockheed Corp. and Loral Corp.

Yesterday, United Technologies jumped $1.375, to $48; Martin Marietta rose 87.5 cents, to $73.25; Lockheed gained $1.25, to close at $62.625; and Loral increased $1, to $54.375. All are trading at or near 52-week highs.

A broader measure of the defense companies' increase can be gauged from Kidder, Peabody & Co. Inc.'s index of defense stocks, which has risen 15 percent over the past two weeks.

Many analysts believe that these and other defense companies have been undervalued because of President Clinton's plans to cut the military.

They say that not only have these programs already been discounted by the market, but also that the companies are attractive thanks to recent consolidations and cost-cutting.

"Only now are people beginning to see that these companies have a future. This does not mean a return to the Cold War, but also not the utopian view of the world espoused by Congress," said Michael Lauer, a defense and electronics industry analyst for Kidder, Peabody.

With companies slimmer, budget cuts already announced and danger in the world still afoot, defense companies should be set for a continued rise, Mr. Lauer said.

Should the turmoil increase and the administration slow the pace of defense cuts, smaller electronics firms would probably be in an even better position to benefit than the old defense workhorses of the Cold War, said Byron K. Callan of Prudential Securities Inc.

Companies such as Loral, Logicon Inc., Alliant Techsystems Inc., Raytheon Co. and Harris Corp. would be best able to win contracts for next-generation defense equipment, Mr. Callan said.

Not all military industry observers, however, believe that defense companies are certain to benefit from current affairs.

Seth Arenstein, managing editor of Defense Daily, said even if Mr. Yeltsin was dumped in favor of a hard-liner, Congress and the Clinton administration were hardly likely to launch a military buildup.

"If I were a defense executive, I wouldn't be licking my chops. I would not be popping champagne corks, although I might be sleeping better at night," Mr. Arenstein said.

As evidence of this, Mr. Clinton and Defense Secretary Les Aspin have both said recently that cuts would continue despite the Russian problems.

Although some conservative legislators have been arguing that the turmoil shows the cuts are premature, Mr. Clinton still has the votes, Mr. Arenstein said.

All sides agree, however, that it was too soon to commit long-term investments in defense stocks. Much of the recent rise, Mr. Callan said, was probably short-term speculation that the Russian uncertainty would last long enough to influence Congress' vote on the military budget in April.

The recent gains could easily be wiped out, however, if Mr.

Yeltsin weathers the storm and the U.S. cuts go through as scheduled.

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