A Defense Opportunity?
A Defense Opportunity?
By Steven Lord
Friday Nov 10, 2006
Dear American Capitalist Reader,
The midterm elections earlier this week has brought selling pressure onto several sectors on Wall Street not expected to do terribly well under a Democratically controlled Congress. Chief among them, it seems, is defense -- understandable perhaps, given the focus on Iraq during the campaign. And I have no doubt there will be panels and committees formed to look at a variety of defense budget issues, contract oversight, etc. But regardless of how many Congressmen set up “inquiries,” it was clear even before the election that the Dems favored neither a rapid pullout from Iraq nor a dramatic decline in defense funding. Moreover, current budget appropriations (i.e., money for which the check has already been written) will carry through at least the early part of 2008.
Yet Wall Street has yet again been acting with its heart instead of its head, and selling defense names with abandon. Take, for instance, Teledyne (TDY), a smallish maker of commercial and defense electronic components, instruments and communications equipment that has been around since the space program began in the 1960s. Since mid October, when it was becoming very clear the Democrats would win the election, TDY has fallen from $45 to $39, in spite of stellar third-quarter results. Indeed, TDY posted earnings of 63 cents per share, 40% higher than last year and 6 cents ahead of consensus, while boosting revenue by 24% to $364 million. All four of the company’s segments posted double-digit sales growth, return on equity is north of 20%, and the firm boosted 2006 EPS guidance to at least $2.20. In short, the company is firing on all cylinders.
The bottom line: The knee-jerk reaction to the Democratic win this past Tuesday will prove to be short-lived in stocks like TDY, since they should continue to book extremely solid sales and earnings gains regardless of what happens in Congress. Put TDY on your radar.
Until next time,
Steven Lord
Editor, Trend Investor