Defense stocks clouded by US budget anxiety

ATLANTA, April 2 (Reuters) - U.S. defense contractors are anxiously awaiting U.S. President Barack Obama's fiscal 2010 budget, but some analysts think reforms and possible spending cuts on arms programs could pressure shares of those companies in the next year or two.

"The spending for this fiscal year and fiscal 2010 still looks healthy" despite slower growth rates, said Craig Fraser, managing director at Fitch Ratings.

"The biggest risk is what happens beyond fiscal year 2010," when there could be meaningful spending changes with Obama's imprint.

Over the past month, some analysts have cut price targets on defense companies, fearing that uncertainty about spending priorities under Obama could limit performance.

Heidi Wood, Morgan Stanley managing director, said last week the sector is underperforming partly because investors are unnerved by the administration's talk about "tough choices" and the need to reform defense procurement.

She said the sector historically does well in an election year, but its performance was not as strong the year after.

The Standard & Poor's Aerospace and Defense Index .GSPAERO is off 13 percent this year.

Among big contractors, the stock of Lockheed Martin Corp (LMT.N) has fallen nearly 18 percent so far in 2009, Boeing Co (BA.N) is off about 13 percent and Raytheon Co (RTN.N) is down 21 percent.

Wood said defense stocks were a good investment heading into a recession, outperforming by a "measurable percentage," but generally did not bounce back as well as the overall market when the economy was heading back upward.