Defense Stocks At The Turning Point

WASHINGTON, D.C. – With the election of Barack Obama, uncertainty hangs over U.S. defense companies. Michael Lewis, equity analyst at BB&T Capital Markets, isn’t ready to make a call on how things will shape up for this sector in the Obama administration’s first six months.

“It’s very difficult to determine until we actually begin to see directional changes in funding or contracts actually starting to be pulled to the side,” he says. “Longer term, I do think there will be some type of sea change with regard to how dollars are spent.”

Fittingly, U.S. aerospace and defense stocks didn’t dodge Wednesday’s post-election market drop. The S&P 500’s aerospace and defense constituents fell 5% yesterday, in line with the broader index’s decline.

Full story at Forbes.com

Green Power

In early 2000 the San Diego County Water Authority flipped the switch on the Rancho Penasquitos Pressure Control & Hydroelectric Facility. For the $22 million project, engineering firm Black & Veatch designed an intricate series of computer-controlled connections that jacked up the pressure on water moving through a 22-mile pipeline. Result: swifter water flow for the authority and enough excess hydraulic pressure to run a 4.5-megawatt turbine. That provides sufficient juice both to power the Rancho Penasquitos system and to net the authority $1 million a year in emissions-free electricity sales back to its energy utility.

Such energy-water twofers represent an emerging sweet spot for Black & Veatch, ranked 126 on our Private Companies list. This 93-year-old engineering firm has made a large part of its living from big, carbon-spewing power plants. Now it is being reborn as a green company. It will help its clients cut emissions.

Power-related projects accounted for half of the Kansas City outfit’s $3.2 billion revenue last year. Water made up 38%. “This nexus of energy and water is a big deal,” says Chief Executive Len C. Rodman, 59, who likes to see fuel, power and sustainability as one large-scale piece. “It’s going to be a bigger deal.”

Full story at Forbes.com

Labor’s Green Energy Elevator Pitch

Washington, D.C.–As the notion of the “green economy” has come into vogue over the last few years, organized labor licked its chops. Take the Apollo Alliance, for example. The labor-sponsored group launched in 2004 with claims that a shift to renewable energy could create 3.3 million jobs, presumably unionized, in the U.S.

At a mid-September forum in Washington, D.C., organized by the Cleantech Group, two labor reps made their case to the venture financiers now putting money into newfangled energy technology companies. They dangled labor’s political muscle, $5 trillion in union pension assets and an emphasis on flexibility and partnership.

“Partnership is the most important thing that we want to get across to you today,” said Christopher Chafe, executive director of Change to Win, a federation of seven unions with 6 million members. Chafe seasoned his remarks with words like “dialogue” and “relationships”–he used some variation of “partner” at least a dozen times.

Full story at Forbes.com

$488 Billion? That’ll Do, For Now

Tuesday, President Bush signed into law a giant spending bill that, among other things, appropriated $488 billion for the U.S. Department of Defense for 2009. The defense spending sum fell $4 billion short of the president’s budget request but represented a 6% increase over 2008 funding levels.

“Not bad,” says Cord Sterling, vice president for legislative affairs with the Aerospace Industries Association (AIA), of the $488 billion. “That’s a pretty good amount of money.”

But pretty good needs to be a lot better, according to the AIA. The Rosslyn, Va., trade group, with a $10 million budget and 60 staffers, is pushing the industry position that the incoming administration and Congress must set defense spending at a minimum of 4% of gross domestic product, not including supplemental wartime spending bills.

The $488 billion in defense appropriations amounts to just 3.5% of U.S. GDP.

Full story at Forbes.com

Mid-Cap Beltway Bets

As part of our Washington coverage on Forbes.com, we take a keen interest in companies doing significant business either directly with the U.S. federal government or with the big contractors catering to it.

One reason: investment opportunity. Sometimes it pays to make a bet on a company with products or services that have struck have the fancy of a huge, sophisticated and deep-pocketed customer: Uncle Sam.

We’ve used our annual list of the 100 Best Mid-Cap stocks to test the proposition, with good recent results. The seven stocks we highlighted in this 2007 story show a 12-month total return of 2%, through our price date of market’s close on Sept. 18, versus a 19% drop (total return) for the S&P 500.

Full story at Forbes.com

Best Countries For Business: Stock Bets

Washington, D.C. – The International Finance Corporation, the private sector arm of the World Bank, releases its annual “Doing Business” report this week. The report, based on a survey of 6,700 business experts across the globe, ranks 181 countries by their hospitality to private enterprise.

The IFC describes its report–which looks at criteria such as enforcement of contracts, taxes and cross-border trade–as “a kind of cholesterol test for the regulatory environment.”

By the IFC’s tally, Azerbaijan, consistent with reform-happy Eastern Europe and Central Asia, has made the biggest improvement to its business climate recently. Meanwhile, 28 African countries have taken steps to make doing business easier, a number the IFC calls a record.

For the last several years, we’ve used “Doing Business” as a tool for stock pickers. The gist: International investors should stick with companies in countries with the most business-friendly regulatory frameworks. We start with the 30 countries taking the top spots on the IFC’s “Ease of Doing Business” rankings. You can find the full list here.From there we look for publicly traded companies from those countries.

Full story at Forbes.com

Pentagon Worries About Chinese Chips

Washington, D.C. – At a conference in Washington, D.C., this week, a Department of Defense official sounded a startling alarm.

“The defense community is critically reliant on a technology that obsoletes itself every 18 months, is made in unsecure locations and over which we have absolutely no market share influence,” said Ted J. Glum, director of the DoD’s Defense Microelectronics Activity unit.

“Other than that,” he cracked, “we’re good.”

Glum addressed his comments to a crowd of defense officials and industry execs gathered for the 2008 Common Defense Conference, or ComDef, an internationally focused event held annually in Washington.

This year, threats to computer networks were front and center. But Glum underscored that the Pentagon has hardware headaches too, particularly when it comes to microprocessors. Ninety percent of the department’s obsolescence problems, he said, are related to electronics.

Full story at Forbes.com

Beltway Bet: NICE Systems

The last 10 years have been quite a ride for shareholders in Israel’s NICE Systems, a developer of data-analysis technology for use in security and customer service. The Nasdaq-listed stock jumped to a tech-boom high of $50 in March 2000, only to sink to $3 per share a year and a half later. Since then, it has gradually recovered and now trades at $31.

Equity analyst Daniel Ives of Arlington, Va.’s Friedman, Billings, Ramsey & Co., believes NICE Systems’ (nasdaq: NICE) stock will continue to climb back toward its 2000 peak.

“They’re a well-run company,” he says. “The stock is undervalued based on growth.” (Note: Friedman, Billings, Ramsey makes a market in NICE Systems shares but does no banking work for the company).

One reason for his optimism: the potential in NICE’s security and surveillance business, which accounted for 24% of its $517 million in sales for the year ended December 2007. Ives thinks NICE can build on its big wins with government customers like the Federal Aviation Administration and the city of New York.

Full story at Forbes.com

Solar Entrepreneur To Feds: Step It Up

At the upcoming U.S. political conventions, it’s a safe bet you’ll hear more than a little bluster from Democratic and Republican parties about the need for federal “investment”–don’t call it a subsidy–in renewable energy technologies such as solar, wind and so on.

A lot of hot air? It won’t be for Frank van Mierlo, co-founder and president of Lexington, Mass.-based 1366 Technologies. The young company has raised $12.4 million in venture money in support of its mission to make solar power cost-competitive with coal by 2012.

Key to that mission: a more vigorous role for the U.S. government. “There is no way that we can change the energy resources in our society without real leadership from the government,” says van Mierlo. “The current administration, it’s sad to say, has not provided that leadership.”

Full story at Forbes .com

Government Tech Stocks: Don’t Fear November

Washington D.C. – U.S. Air Force Captain turned stock analyst, Raymond James’ Brian Gesuale keeps tabs on 14 companies selling technology or technology services to government agencies–military and civilian. One issue he’s not too concerned about these days: McCain versus Obama.

“The general message we’re putting out there is, ‘Don’t be afraid of politics and the election this year,’ ” he says.

That advice isn’t for every defense investor, however. Gesuale thinks stocks of defense giants like Lockheed Martin (nyse: LMT – news – people ) or Northrop Grumman (nyse: NOC – news – people ), as well as companies who sell war “consumables” (ammunition and so on), could well get knocked around by electoral outcomes.

In contrast, Gesuale suggests the stocks he covers–small- and mid-cap technology concerns–likely stand only to benefit from a changing of the political guard. One reason is that these smaller players tend to suffer disproportionately from budget uncertainties. When Congress and the Bush administration battle over military spending priorities, as they did over supplemental war funding earlier this summer, the odds rise that money for new technology will get squeezed or cut.

Full story at Forbes.com