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Litton Stock Plummets on New Earnings Estimate


Shares of Litton Industries Inc. plunged about 25% on Wednesday after the large defense contractor said it expects flat earnings this fiscal year because of production delays and cost overruns on new ships and military electronics products.

The sharp drop--Litton's biggest single-day decline since the stock market crash of October 1987--came despite a better-than-expected fourth-quarter earnings report and efforts by company executives to assuage investors' concerns with the disappointing profit outlook.

"We would like to liken it to a transition period," said Randy Belote, a Litton spokesman. "There are a number of programs in development and when they go into production [profit] margins are going to increase. We'll be back to double-digit increases that we experienced in the past."

Investors were not convinced, however. In heavy trading on the New York Stock Exchange, Litton shares tumbled $13.06 to close at $41.

"It was a lot worse than what anybody thought," said Thomas Meagher, an aerospace and information technology analyst with BB&T Capital Markets in Tysons Corner, Va. "There is a hefty dose of scepticism that the company can hit its earnings targets."

Woodland Hills-based Litton said earnings for its fiscal first quarter, which began Aug. 1, will be 10% to 20% below the year-ago level of $1.13 a share. As a result, the company said it expects profit for this fiscal year to remain relatively flat. Analysts were anticipating per-share earnings to increase about 12% for fiscal 2001.

Litton executives blamed delays in development of several major projects, including electronic warfare systems for advanced fighter planes being built for an international client and new oil tankers that have required an "unusually large" amount of design and construction time.

At its Avondale unit shipyard in New Orleans, the company is building double-hulled tankers for transporting Alaskan crude. Litton's Belote said that lead ships--the first of a particular class--take longer to produce and are more costly because they require more rigorous testing.

Litton has also been hampered by design, cost and schedule problems with its largest Navy contract, a $10-billion program to build a new class of amphibious warfare ships. The amphibious transport docks are designed to carry about 720 Marines, air-cushioned landing craft, transport and attack helicopters and the new V-22 Osprey tilt-rotor aircraft. The first two ships in the class, the San Antonio and the New Orleans, are estimated by the Navy to be about 30% over budget and about 10 months behind schedule.

But earnings should improve in the fiscal third and fourth quarters, Litton executives said in a conference call with analysts Wednesday, returning the company to double-digit growth thereafter.

"We are confident that prospects for shipbuilding, information technology and commercial electronics can support accelerated growth in sales and earnings beyond fiscal year 2001," Chairman and Chief Executive Michael R. Brown said.

He added, however, that "the current environment is one of development and investment," and said the company will review "all strategic options available, such as consolidations and dispositions."

"We are not satisfied with the prospects of zero to 5%" profit increase in fiscal 2001, Brown said.

Jon B. Kutler, president of Quarterdeck Investment Partners Inc., a defense industry investment bank in Century City, said Wednesday's dip in Litton stock reflects continuing concerns among investors who are having difficulty valuing the company.

"Litton has not effectively told its story to Wall Street," Kutler said. Investors "don't know whether Litton is an information technology company, a shipbuilder, or a merchant supplier, so when you have any kind of negative news, their periscopes go up."

Indeed, investors virtually ignored the company's better-than-expected earnings report.

For its fourth quarter ended July 31, Litton posted net income of $69.8 million, or $1.52 a share, contrasted with a loss of $21.4 million. Revenue was up 19% to $1.47 billion.

Litton was expected to earn $1.49 a share, according to a consensus of nine analysts polled by First Call/Thomson Financial Service.

For fiscal 2000, Litton earned $218.4 million, or $4.74 a share, contrasted with $120.6 million, or $2.58 a share, a year earlier.


Lagging Litton

Litton's shares tumbled about 25% Wednesday, their biggest single-day drop since the 1987 market crash. The stock is off 36% from its 52-week high of $63.69.


Litton shares, monthly closes and latest

Wednesday: $41, down $13.06

Source: Bloomberg News

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