Defense spending is set to rise, not fall
Last month several Wall Street firms lowered their ratings on the defense industry. They argued growth in defense spending will soon slow and that by around 2006 spending actually will decline. Given this scenario, they projected slumping profits for military contractors.
We think they’re wrong, and in fact we think defense spending will almost certainly rise, benefiting dominant defense companies. Why? It’s the “e” word—energy, or, if you prefer, the “o” word, oil. In coming years, no matter what else is going on, we will need a strong military stick to ensure our access to ever more constricted energy supplies. This will propel the earnings of two of our Growth Portfolio stalwarts, Northrop Grumman and General Dynamics. Note that both these companies, like the ones profiled in the preceding article, are market dominators. But they offer the additional advantage of compelling valuations.
Here’s our reasoning on oil and defense. We can’t run our economy without imported oil.
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