Value Added
Defense Stocks Ready to March
These four contractors are helping to build a higher-tech military.
By Steven Goldberg, Contributing Columnist, Kiplinger.com
March 4, 2003
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No matter what happens in Iraq, cheap defense stocks are ready to mobilize.
That’s the word from Brian Berghuis, commander-in-chief of T. Rowe Price Mid-Cap Growth fund (RPMGX).
Berghuis, 44, has a record of being right. He launched the fund 11 years ago. It has finished in the top 20% or better among mid-cap growth funds over the last one, three, five, ten and 15 years.
War machines
Defense stocks rose sharply after 9/11, but have retreated since. The problem, Berghuis believes, is that they’re only considered by value investors and are overlooked as potential growth stocks.
"Defense is going to be a growth area relative to the rest of the economy for the next ten years," Berghuis says. The reason is due to a former ally of many an investor -- technology. While private-sector tech has evolved tremendously in the last decade, "we’re only scratching the surface in using technology in defense," Berghuis says.
The strength of the private sector in technology has sucked most of the talent away" from the military and space program, Berghuis says. That created a technological lag that is now being closed, he says.
The vanguard
Among the stocks Berghuis likes:
Rockwell Collins (COL), spun off from Rockwell International a couple of years ago, dominates cockpit aviation electronics, Berghuis says. The stock sells for 15 times analysts' consensus earnings estimate of $1.34 for this year.
Harris Corp. (HRS) is a communications company with about half its business in defense. Their specialty is building sophisticated ground communications networks. The stock trades at 21 times estimated earnings of $1.39. Berghuis expects earnings to rise 15% to 20% annually for the next five years.
He also likes Alliant Techsystems (ATK), which supplies defense and aerospace products to the government. It sells at 14 times 2003 estimated earnings of $3.26.
Finally, Berghuis recommends L-3 Communications (LLL), a defense communications firm. It trades at 13 times this year’s estimated earnings of $2.71.