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Turbulent Times For Aircraft Builders

IS there anyone left in the United States who hasn't read or heard news reports about the shakeout in the United States commercial airline industry? By the mid-to-late 1990s, so we've been told, the industry is expected to have only four or five major carriers. A number of stock market analysts are also privately saying that the economic turbulence buffeting the carriers - overly leveraged companies, high energy costs, too many competitors - is also affecting manufacturers of both commercial and military aircraft. Some analysts suggest that by the end of the decade there will be fewer aerospace manufacturers. Mergers are possible. More likely, hard-pressed aerospace manufacturers are expected to move out of the defense sphere into new lines of manufacturing. A nd only one or two companies are expected to be major builders of civilian aircraft.

Analysts for Merrill Lynch, for example, see the post-Vietnam-war defense cycle as peaking. Phil Friedman and Jennifer Pokrzywinski, analysts for Morgan Stanley & Co., project annual declines in real (inflation-adjusted) defense outlays of between 5 and 7 percent over the next five years.

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Many aerospace stocks have been laggards during recent months, in part, according to Merrill Lynch, because weaknesses in the aerospace defense sector have offset the strengths of the commercial sector.

That trade-off gives an advantage to companies, such as Boeing and Lockheed, that either have a footing in both defense and commercial spheres, or are particularly strong in civilian production. Of the seven or so companies in the aerospace sector currently followed by the Kemper Securities Group, analyst Lawrence Harris has strong ``buy'' recommendations on just Boeing and Lockheed; he has a long-term buy recommendation on Martin Marietta. He recommends that investors hold any stock they already own o f McDonnell Douglas, Northrop, Rockwell International, and Rohr Industries Inc.

In the case of McDonnell Douglas, one of the great old-line aerospace firms, the challenge is two-fold, analysts note: In dollar terms, McDonnell has been the No. 1 US defense contractor since 1987. Defense programs make up a big part of revenues. So federal cutbacks are already hurting McDonnell Douglas. Washington recently canceled the $57 billion A-12 fighter program, a mainstay for McDonnell. On the commercial side, the company's new MD-11 jumbo jet aircraft program has yet to win widespread enthusi asm from carriers.

Indeed, McDonnell was surpassed last year as the world's second largest maker of commercial aircraft by Airbus Industrie, a European aerospace consortium. (Boeing, based in Seattle, is first.) Airbus has a backlog of civilian orders amounting to about $70 billion, twice that of McDonnell, with a backlog of about $35 billion at the end of 1990.

Boeing continues to win civilian contracts. Harris, of Kemper, reckons that Boeing's backlog is now around $102 billion. Orders from US carriers make up only one-third of the backlog. Many of the orders, particularly for the 747-300 jetliner program, come from such affluent Pacific-Rim carriers as Japan Airlines, Korean Air, Singapore Air, and All Nippon.

Harris sees Boeing's earnings growth continuing through 1995. Although Boeing stock has been a market laggard, largely because of concerns about development costs for the new 777 jetliner and possible cancellations linked to the recession, Harris in a recent report concludes the stock may be undervalued.

Harris calls Lockheed the new ``top gun'' of the aerospace defense sector, given its continuing diversity.

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He says Lockheed is in a good position to grow, based on its participation in a new satellite venture, as well as a possible restart of the F-117A Stealth fighter production line. The Stealth was one of the technological winners in the Gulf war. However, 1991 is expected to be a somewhat difficult ``transitional'' year for Lockheed. Looking ahead, Harris believes the company's earnings will go into ``supercruise'' in 1992 and 1993.

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