While other stocks drop, defense shares gain in volatile trading

by Travis Reed

The market might have been dismal for the Dow on Monday, but a few specialty stocks gained heavily.

Defense industry stocks, such as Edina-based Alliant Techsystems Inc., spiked as investors bailed primarily on aerospace holdings.

Alliant, which did $1 billion of business in munitions and rocket propellant systems last fiscal year, finished at 78.70, up 20 percent from last Tuesday’s closing.

“Undoubtedly, there will be big increases in defense spending, and (the gains) will continue as long as that occurs,” said Bruce Erickson, a Carlson School of Management professor.

Alliant spokesman Rod Bitz said the company can’t disclose whether orders have stepped up since last week’s attack.

Although defense companies in general proved their stocks impervious to the downturn, the prices were dictated by investor speculation. As the Department of Defense decides what products to order, leaders are expected to emerge from the pack.

“The critical question is, what percentage of the orders will each company get? Does it produce the equipment that the Department of Defense decides it needs under these circumstances?” Erickson asked. “The positive side is the profit
margins should be good, because the Defense Department will want to get products in a hurry. They may be willing to pay a premium.”

Erickson said defense contracts are generally awarded in one of two ways. In one scenario, the defense department will specify an objective it wants equipment to accomplish and will give the contract to the lowest bidder.

In the other, which he speculates is more likely in the near future, the department will draw up specifications and award contracts based on cost and expediency.

Alliant is headquartered in Minnesota but owns factories all over the country that actually produce the munitions. The Edina building houses three floors of offices where around 200 employees work.

Travis Reed welcomes comments at [email protected]