Economies of scale working for Martin


When Martin Marietta Corp. announced in December that it was buying the space systems division of General Dynamics Corp. -- primarily its Atlas rocket program -- for $208.5 million, it didn't set off a lot of fireworks on Wall Street.

The Atlas, the nation's first intercontinental ballistic missile and the craft that powered astronaut John Glenn into orbit, had fallen on hard times.

The Atlas experienced three failures in its last dozen launch attempts, and General Dynamics suspended the flights.

The space systems division posted a loss of $41 million in 1992, and at the time of its sale the company's chief executive was predicting that 1993 would be another losing year.

"I'm not quite sure why they [Martin Marietta] are buying it," was the response from one aerospace industry analyst.

Well, a new research study by Prudential Securities offers insight into Martin Marietta's reasoning.

"With the recent closing of the acquisition of the General Dynamics space launch business, we are beginning to feel a little more comfortable that Martin Marietta can earn a reasonable profit from that operation -- whereas General Dynamics, at best, was only expected to break even next year," Prudential analysts Gary J. Reich and Lori B. Jacobowitz say in a recent research report.

"The reason for our optimistic outlook is quite simple. Martin Marietta did not purchase some of the plants and facilities

owned by General Dynamics in San Diego, and the company is rapidly moving to consolidate these operations to create a money-making business."

The analysts estimate that the former General Dynamics space launch systems group this year will have operating margins of 5 percent, compared with operating margins of 8 percent for the total Martin Marietta space group. Next year, the former General Dynamics operations' margins should improve to 7 percent, the analysts say, and should reach parity with the rest of the Martin space group operations by 1997.

Norman R. Augustine, chairman and chief executive of Martin Marietta, has preached that the company's best chances at surviving defense budget cuts and continuing to grow is through acquisitions and a consolidation of operations to boost efficiency by taking advantage of economies of scale.

Its purchase of General Electric Co.'s aerospace division last year for more than $3 billion was part of that strategy, as was its failed attempt earlier this year to buy Grumman Corp.

Despite these moves, the Prudential analysts give Martin Marietta's stock, which closed yesterday at $43.75, up 37.5 cents, a "hold" rating, meaning there is moderate risk.

"Despite the recent acquisition . . . we do not view Martin Marietta's current mix as a growth business," the analysts say. "We anticipate that sales for the whole company will remain rather stagnant over the next five years, with low double-digit earning growth during this period."

They project a lackluster 6 percent growth rate over the next five years, with earnings of $5.10 a share at the end of this period.

Martin Marietta earned $450 million, or $3.80 a share, last year before an after-tax charge of $429 million related to an accounting change. Sales totaled $9.4 billion.

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