Report: Deal Making Will Stay Aloft In Aerospace

Washington, D.C. – Over the past 12 months, valuations have plunged in the aerospace and defense sector. Last July, for example, U.S. aerospace and defense stocks traded at an average 23 times trailing-12-month earnings, according to an aggregate compiled by FactSet Research Systems. The average price-to-earnings ratio presently: 13.

Despite the compression in the average earnings multiple, it is not easy to be bullish here, as business has turned nasty for commercial aerospace customers. Tuesday, the Air Transport Association, the airlines’ trade group, announced that first-quarter expenses for airlines grew at the fastest pace since 1980. The biggest culprit: a 51% year-over-year increase in the average price of aviation fuel.

Beyond pure contrarianism, do bargain hunters have any reason to jump into aerospace and defense? One may be consolidation. As some investors retreat from these companies, corporate deal makers remain interested, according to a report released Monday by PricewaterhouseCoopers. The accounting firm says the sector saw $31 billion worth of aerospace and defense acquisition activity worldwide in 2007, the most since a peak of $46 billion in 2000, and forecasts significant merger and acquisition activity for the next one to two years.

Full story at Forbes.com

Defensive Defense Stock: Saab

With rising energy prices threatening commercial aviation, aerospace and defense stocks haven’t fared well in the global equities downturn. Year-to-date, according to an index tallied by FactSet Research Systems, the stocks of aerospace and defense companies worldwide have dropped 19% in dollar terms, versus an aggregate decline of 14% across all sectors globally.

At least one aerospace and defense stock, however, has bucked the year-to-date trend: Saab, the Swedish maker of military aircraft, aviation components and command and control systems. The share price for the Stockholm-headquartered company, not to be confused with the auto brand now owned by General Motors (nyse: GM – news – people ), is up 17% so far in 2008.

Even with the uptick, Saab still looks cheap. Its Stockholm-listed shares sell for just 10 times the average analyst estimate for 2009 earnings per share. Contrast that with equivalent multiples of 12 for Lockheed Martin (nyse: LMT – news – people ) and 13 for Raytheon (nyse: RTN – news – people ). Those interested in international investing should put Saab on their radar screen.

“In this turbulent time, we believe investors will appreciate this type of company more and more,” says Mikael Laséen, a Stockholm-based analyst at Kaupthing Bank, speaking of Saab. “It is of course a political risk, but clearly you don’t have to worry about the business cycle and consumer spending that much.”

Full story at Forbes.com

Seven Cheap Global Stock Picks

Raymond Mills can’t talk about the job he held before signing on to T. Rowe Price. Literally. With a doctorate in aerospace engineering from Stanford University, he worked on some sort of national security-related program until a decade ago. “It was classified,” is all he’ll say.

Less spooky is the way the manager of T. Rowe Price’s $1.5 billion (assets) Overseas Stock Fund picks stocks. Some of Mills’ selections are household names. Others are practically unpronounceable. All, in his view, offer above-average earnings growth–thanks to superior products, market dominance or exposure to fast-growing economies–at reasonable prices. For investors, that adds up to a way to ride out and profit from the market’s current volatility.

Toyota Motor (nyse: TM – news – people ), a Mills favorite, is a good example. “Honda and Toyota are leaders in hybrid technology and fuel efficiency,” he says. “They’re going to be winners over time.”

Long-term promise aside, Toyota shares are down 20% from a 52-week high amid the malaise in the global auto business. That has left the stock selling at nine times latest-12-month earnings, versus a five-year average of 13.

“Maybe we don’t think it’s going to be a great stock for the next year,” he says of many of the shares he tucks away, “but we think it’s going to be a great story over the next two to three or five years.”

Full story at Forbes.com

Tough Times Spawn Opportunities For Washington VCs

Washington, D.C. – The U.S. venture capital business has been slogging through a rough patch. The first quarter of 2008, according to the National Venture Capital Association, saw just five initial public offerings by venture-backed start-ups. Meanwhile, just 56 venture-backed firms were sold or merged, down from 82 and 104, respectively, in the first quarters of 2007 and 2006.

The principals of RedShift Ventures, a Washington, D.C.-area venture capital firm, don’t gloss over the problems. “It was just brutal,” says general partner Mark Frantz, of the first quarter. “I don’t see a lot of indicators on the horizon that are going to change that,” adds Richard Harris, another general partner and RedShift’s founder.

But from RedShift’s view, the tough outlook for making money on the back end hasn’t dampened entrepreneurial activity on the front. “We see a tremendous amount of deal flow,” says Harris.

Paradoxically, Harris suggests one reason for all this opportunity is corporate skimping on research and development. “In this economic environment,” explains Harris, “large companies seem less interested in funding cutting-edge research than they are just shoring up their core businesses.”

Full story at Forbes.com

Hybrid Trucks Drive Through The ‘Valley of Death’

As we noted recently, use of hybrid engine technology in commercial trucks remains very much in its infancy. Expect that infancy to last a while, even with diesel prices soaring. A hybrid big rig costs 50% more than a conventional one, too rich a premium for most consumers. The federal government, while interested in promoting more efficient trucks, isn’t a likely savior here.

All this was up for discussion at a Tuesday Capitol Hill hearing, held by the House Committee on Science and Technology’s Subcommittee on Energy and the Environment. “The truck industry is due for a major technological shift, said Rep. Nick Lampson (D-Texas), the subcommittee’s chair, “but advances in this sector don’t come easily.”

Full story at Forbes.com

Aerospace’s Bullish Hawk

Thirty years ago, before he jumped into securities analysis, Richard Whittington paid his dues working in the bowels of the U.S. Department of Defense and the Rand Corp. (a think tank catering mostly to the U.S. government). He ran budget analyses and worked over different Cold War scenarios, like what kind of troop levels were sufficient to block a Soviet thrust into Western Europe.

Now at JSA Research, an independent equity research boutique focused on aerospace and defense, Whittington has a worldview that remains very much informed by those Cold War days.

“There is an emerging threat,” says Whittington, 58. “China is spending an increasing sum of money on its military, including frontline aircraft.” He also points to China’s moves to secure energy supplies, a historically rich source of global conflict.

Full story at Forbes.com

Credit Suisse’s Robert Spingarn

Analyst: Robert Spingarn

Firm: Credit Suisse

Industry: Aerospace-Defense

Rank: 1

Robert Spingarn, aerospace and defense analyst at Credit Suisse (nyse: CS – news – people ), ranks first among all his peers on Wall Street in Forbes.com’s 2008 survey of America’s best stock analysts. Spingarn earns the award with solid judgment, as measured by our data partner Zacks Investment Research, in both forecasting earnings and picking stocks over a three-year period.

In the latter category, Spingarn benefited especially from bullish calls on BE Aerospace (nasdaq: BEAV – news – people ), Precision Castparts (nyse: PCP – news – people ) and Armor Holdings (nyse: AH – news – people ). From mid-May 2005, when Spingarn put positive ratings on the stocks, through the end of 2007, each clocked triple-digit gains. Click here for more on the methodology underlying our rankings.

Full story at Forbes.com

Bears Bellowing In Forbes Stock Contest

If your stock portfolio looks dinged up these days, take heart. The last few months have also been hard on the bulls participating in our annual stock-picking contest. From the end of October 2007 through Wednesday’s market close, their 12 long calls are down an average 15%, compared with a 9% drop for the S&P 500.

The bears have done better. So far in the contest, four of their five short-sale ideas are in the red, showing an average price decline of 17%.

Full story at Forbes.com

Forbes Beltway Index: Methodology

Washington, D.C. – The Forbes Beltway Index tracks the market progress of the publicly held companies that figure among the 1,000 largest contractors working for the U.S. federal government.

Each Monday, we update price data for the index, in which we give equal weight to each of the component stocks, which number 202. With an equal-weighted index, all components have the same contribution to the index value. This contrasts with big indexes such as the Standard & Poor’s 500, which are weighted toward companies with the largest market capitalizations.

We get our information on government contractors from Eagle Eye Publishers, a 10-person research company in Fairfax, Va. Eagle Eye caters to both commercial and government clients. Among its public sector customers is the Congress.

The U.S. government does around $430 billion in business with contractors each year. Eagle Eye’s specialty is analysis of prime contracts, or those that the federal government awards directly to a company.

Full story at Forbes.com

Changes To Forbes Beltway Index

Washington, D.C. – Since April 2006, we’ve presented the Forbes Beltway Index on Forbes.com. This week, we revise and expand the list with a new approach.

Our new methodology, discussed in more detail here, allows us include more government contractors than we did in our prior Beltway Index efforts. Our starting point now is the 1,000 largest contractors to the U.S. federal government for fiscal 2007 (ended September 2007), with information provided to us by research firm Eagle Eye Publishers.

From that group of 1,000 contractors, we identified the publicly traded companies. That narrowed the list down to 202, based on fiscal 2007 data.

Full story at Forbes.com