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Military Surge Will Pressure Demand in Defense Sector

Today, additional U.S. troops are heading to Iraq as a part of the President’s plan to increase armed forces on the ground. A large percentage of the 21,500 additional service men and women will be stationed in Baghdad to help fight insurgents. Asked how long that buildup might last, Defense Secretary Robert Gates said, "It's viewed as a temporary surge, but I think no one has a really clear idea of how long that might be." On CNBC’s "Morning Call" Liz Claman took a closer look at the troops surge and the companies involved in the build-up.

The Bush plan raises the number of Americans in Iraq from 132,000 to 153,500 at a cost of $5.6 billion. "And it’s a strategy that will rely heavily on ground forces," said military sector analyst Wolfgang Demish. “That’s tanks, trucks, vehicles and the associated support gear.”

He explained that companies with large exposure to the army (as opposed to other branches of the armed services) are going to see demand rise. “Companies like General Dynamics , Textron and London Based BAE Systems.” (Also) companies like Armor Holdings (that help with the Humvee's) and companies which make body armor are likely to benefit, added Richard Tortoriello with Standard & Poors.

Beyond Iraq, plans are in place which could increase supply pressures on the military sector even further. Secretary Gates has said he is recommending an overall increase in the military of 92,000 soldiers and Marines over the next five years, bringing the overall total to 202,000 in Marines and 547,000 in the Army worldwide.

That will drive demand further. “We’ve been depleting equipment at a very high rate, explained Tortoriello. “Under the Clinton administration the procurement budget was cut in half so we have very old equipment out there. That equipment is going to have to be replaced.”

Companies that will be involved in rebuilding Iraq’s infrastructure might also present investment opportunities. “I think money is the thing we have the most of, to solve the Iraq problem,” said Wolfgang Demish. Jobs and having people have regular water and power – these are things that are going to be priorities.”

“Training is going to continue to be a priority,” added Tortoriello. “And one company that’s big in military training is L3 communications .

Analyst disclosure: Wolfgang Demish owns shares of BA
Analyst disclosure: Richard Torotriello has no conflicts.

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