US firms cash in on Iraq war

Telco

General Dynamics Corp, Harris Corp and L-3 Communications Holdings Inc benefited most among the Pentagon’s 25 largest military suppliers from five years of war in Iraq, based on a combination of conflict-related sales and stock gains.

General Dynamics and Harris, the Melbourne, Florida-based maker of combat radios, both tripled in stock price in the five years ended March 20, the anniversary of the US invasion of Iraq. L-3, which provides translators, rose 164%. Their gains beat the Standard & Poor’s 500 Stock Index, which rose 52%, and the S&P Aerospace and Defense Index, which more than doubled.

The United States has begun reducing troops in Iraq, a process that may accelerate next year and threaten revenue of companies that gained the most from the war. Heavy combat use of vehicles and equipment still will trigger years of replacement sales. War costs are about $12 billion a month, the Pentagon said on Jan 28. “The war has been a huge benefit to almost all contractors,” said William Hartung, director of the arms and security initiative at the New America Foundation in New York. “Ammunition, armor, vehicles, communications are places where there’s a lot of spending now, and they will have to repair or replace much of it when the war ends.” Congress has approved about $700 billion for conflicts in Iraq and Afghanistan since the 2001 terror attacks, the Congressional Research Service says. That’s on top of the regular defense budget, which is $480 billion this year. The US is pulling five of 20 combat brigades out of Iraq through July. The pace next year may be set by the winner of November’s US presidential election, a showdown between presumptive Republican nominee John McCain, an Arizona senator, and either Senate colleague Barack Obama of Illinois or Hillary Clinton of New York for the Democrats.

General Dynamics benefited from funding to buy and support Abrams tanks and Stryker troop transports, as well as ammunition sales. The company had about $2.35 billion in war revenue last year, the most among US defense companies, based on estimates by Joseph Nadol, an analyst with JP Morgan Securities Inc in New York. At about 9% of sales, it was second to Harris by percentage. Spokesman Robert Doolittle of Falls Church, Virginia-based General Dynamics declined to confirm the data. “We don’t track orders, revenue or income based on where it’s going,” he said. General Dynamics rose to fourth on the Pentagon’s list of prime contractors in 2006, with $10.5 billion in work, from fifth in 2002 at $6.96 billion. The list excludes money received as a subcontractor. The Defense Department hasn’t released 2007 data.

 
ROBUST BUSINESS

“General Dynamics’ business would not be nearly as robust without the war,” Cai Von Rumohr, a Boston-based analyst with Cowen & Co., said in an interview. Harris received an estimated $600 million of war-related sales last year, or about 13% of its total, Nadol said. That was the largest proportion among major defense companies. Harris became the Pentagon’s 25th-largest supplier in 2006, with $1.34 billion in prime contracts, from 48th in 2002. “There has been some benefit from Iraq, but our future is not tied to Iraq or levels of troop deployment, or whether the war is coming to an end,” CFO Gary McArthur said in an interview. He said he was unable to provide a figure for how much annual revenue Harris has received from the war. Harris makes Falcon II radios, which can be mounted in vehicles or carried by soldiers. The radios also can carry data and video as part of an upgrade program that may cost as much as $30 billion, McArthur said. “The whole need to modernize is not dependent on levels of troops in, or not in, Iraq,” the executive said.

Analyst Nadol has doubts. “A combat-vehicle maker like General Dynamics is less exposed than an equipment provider such as Harris” to a drop in revenue, he said. New York-based L-3 benefited through its role as the largest supplier of translation services for the Army in Iraq. L-3 lost the translation contract to a DynCorp International Inc joint venture and became a subcontractor to the new team March 14. L-3 had $1.1 billion of war revenue last year, or about 8% of its total, Nadol calculated. L-3 estimates Iraq- related revenue at about $1 billion last year and this year, spokeswoman Jennifer Barton said.

The Pentagon’s five largest suppliers are Bethesda, Maryland-based Lockheed Martin Corp; Chicago-based Boeing Co; Northrop Grumman Corp. in Los Angeles; General Dynamics; and Waltham, Massachusetts-based Raytheon Co. Aside from General Dynamics, Nadol estimates they got 1% to 4% of 2007 sales from the war. Northrop, the builder of aircraft carriers, won the least: about $300 million, or 1% of 2007 revenue, Nadol said. “Northrop Grumman would be relatively unaffected by a reduction in supplemental funding for Iraq and Afghanistan or a rapid withdrawal from Iraq because our exposure to the supplemental war funding is small,” said Dan McClain, a Northrop spokesman. (people.com.cn)

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