CORRECTED - UPDATE 1-Pentagon buoyed by Wall St. view of defense stocks

Wed May 25, 2011 12:04pm EDT

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(Corrects May 24th story, 17th paragraph to say "in fiscal 2010, such spending totaled roughly 31.5 percent," not "Currently, such spending tops out at about 22 percent")

* Top arms buyer says monitoring Wall Street's view

* "Financially successful" industry termed U.S. interest

* Pentagon aims to promote industry's profitability (Adds Carter, Lockheed Martin, trade group remarks)

By Jim Wolf

WASHINGTON, May 24 (Reuters) - The Pentagon is very encouraged by Wall Street's response to aerospace companies and arms makers, even as U.S. defense spending flattens, the top U.S. weapons buyer said on Tuesday.

"We are monitoring the health of our industry as it is seen by the financial community," said Ashton Carter, undersecretary of defense for acquisition, technology and logistics. "And the information there is very encouraging to us."

Carter made his remarks at a Capitol Hill luncheon co-sponsored by the U.S. Senate's Aerospace Caucus and the Aerospace Industries Association, the arms makers' chief trade and lobbying group.

He spoke moments before outgoing Defense Secretary Robert Gates, in what was billed as a major policy address, said his overarching goal was to preserve a U.S. military "capable of meeting crucial national security priorities, even if fiscal pressure requires reductions in that force's size."

Carter said the industry would have to adjust to cope with a projected spending slowdown now that a post-Sept. 11, 2001, spurt -- which nearly doubled the Pentagon's base budget -- was ending under fiscal pressure to trim the U.S. deficit.

"A strong, technologically vibrant and financially successful defense industry is in the national interest," Carter said. "And importantly, the government's interest is not short term but long-term, like those of long-term investors."

As a result, the Defense Department will promote policies and actions "that provide for the long-term innovation, efficiency, profitability and productivity growth in our industry."

President Barack Obama, as part of a deficit reduction drive announced on April 13, set a goal of holding the growth in core national security spending slightly below inflation for the next 12 years to save $400 billion. Gates in his remarks on Tuesday at the American Enterprise Institute said this corresponded to a projected cut of about 5 percent in constant dollars assuming all $400 billion came from the Defense Department.

Carter told his luncheon audience he was looking frequently at the health of the industry "and how it is regarded."

The median stock price for the top 20 aerospace and defense contractors is about 92.5 percent of their 52-week trading highs, he said.

Trading at this level, Carter said, shows "continuing confidence in the health of our industry that is higher than it is for global information, automotive, steel, energy, telecom and information technology sectors."

The five-year earnings-per-share consensus forecast for the top 20 aerospace and defense companies' growth is 11 percent, he added, "which is moderate but ... augurs well for the future."

Top Pentagon suppliers include Lockheed Martin Corp, Boeing Co, Northrop Grumman Corp, General Dynamics Corp, BAE Systems Plc and Raytheon Co.

Lockheed Martin, the Pentagon's No. 1 supplier by sales, is making cost reduction and affordability a top priority company-wide to deal with the "new reality" of tighter defense budgets, Robert Stevens, Lockheed's chief executive officer, told reporters earlier on Tuesday.

Lockheed now has 126,000 employees, down from 146,000 two years ago.

"And that number may well continue to decline," he said, outlining more than $500 million in cost reductions from such measures as executive buy-outs and facilities consolidation.

The Aerospace Industries Association urged in a study released on Tuesday that 35 percent of the core defense budget be devoted to military modernization, including arms purchases, research and development. In fiscal 2010, such spending totaled roughly 31.5 percent, said Daniel Stohr, an association spokesman.

With worldwide missions and a limited number of service members, the United States "must make up in technological capability what we lack in numbers," Marion Blakey, the group's president, said in a statement. (Reporting by Jim Wolf; editing by Andre Grenon)

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