Defense Electronics Bounces Back a Bit

THE two main manufacturing segments of the defense industry - aerospace and defense electronics - appear to be in relatively good shape for the rest of 1992 no matter how much Pentagon funding Congress and the White House slash.

Given the end of the cold war with the Soviet Union, political pressures will be strong to divert military spending to civilian needs. A number of big-ticket projects will be ended to the detriment of major defense manufacturers.

But aerospace firms such as Boeing and Lockheed not only have sizeable backlogs; they also have been shifting away from defense production toward more civilian or space-related manufacturing. Similarly, experts say, defense electronics firms have backlogs on aerospace contracts. Further, they are expected to win some new contracts for electronic surveillance and satellite systems as a result of regional threats to peace in the Middle East and the Korean Peninsula, where North Korea is said to be developi ng nuclear weapons.

In terms of market performance, the aerospace/defense area has made somewhat of a comeback during the past year. Among all of the industry groups in the Standard & Poor's 500 stock index, the aerospace/defense sector had come in near the bottom a year ago. Three months ago the sector was still in the bottom third; but by January 1992 the sector had moved into the top half in regard to market gains.

Take Lockheed. Lawrence Harris, an analyst with Kemper Securities Group Inc., notes that Lockheed's capital expenditures were $312 million in 1991, down from $340 million in 1990. These capital expenditures are expected to approximate depreciation expenses this year. The result, as Mr. Harris sees it, is that Lockheed should have a significant cash flow in future months. He sees continued earnings gains and a probable dividend increase later this year.

Boeing has a huge backlog of orders for commercial aircraft and continues to win sales abroad, despite tough competition from the European-produced Airbus. Boeing could also face new competition from McDonnell Douglas, which is seeking a joint venture with Taiwan Aerospace Corporation. The government of Taiwan has an equity holding of 29 percent in Taiwan Aerospace. Thus, Boeing is reportedly seeking to limit the terms of any joint venture between McDonnell Douglas and Taiwan Aerospace. But whether Boein g can actually win such a limitation is still unknown.

Still, Boeing's backlog keeps existing factories humming; and the firm is pressing ahead with its new model 777.

Another major aerospace firm, Hughes Aircraft, a unit of General Motors, just announced that as of March 30, its new chief executive will be C. Michael Armstrong. He had been considered the heir-apparent to IBM Corporation chief John Akers. Mr. Armstrong's appointment appears to be a sign that the aerospace and defense electronics firm will be shifting its focus toward commercial markets and away from Pentagon contracts. Defense projects now constitute about 65 percent of the firm's revenues, down from 8 5 percent in the late 1980s.

Diversified electronics firms that have had strong ties to the Pentagon over the past few years include Loral Corporation, Raytheon Company, Varian Associates, and Motorola Inc. Defense analysts say that because of continued aerospace and satellite production such firms should hold their own in 1992, provided they take steps to diversify further from defense work.

The electronics companies also have to be aggressive in wooing investors. Some are doing that. Last week, Raytheon shares rose following a two-for-one stock split. Stock splits make it more affordable for individuals to buy shares in a company.

Despite the positive signs for these companies, experts note that even a minor change in defense spending can affect earnings. Early last year, for example, Motorola sold a large amount of communications equipment to support US troops in the Persian Gulf. Such a sale will not presumably be repeated this year.