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Roosevelt Rifle Maker Is Best Contractor: Riskless Return

The Norwegian munitions maker whose rifles were used by Theodore Roosevelt’s Rough Riders during the 1898 Spanish-American War is proving the best U.S. government contractor for investors.

Kongsberg Gruppen ASA (KOG) in the past five years outperformed 68 federal contractors including Boeing Co. (BA) and Raytheon Co. (RTN) that get at least 3.5 percent of revenue from the U.S. government, according to the BLOOMBERG RISKLESS RETURN RANKING. Kongsberg had the highest total return and lower volatility than 40 of the vendors in the group.

Kongsberg benefited from investments by its biggest owner, the Norwegian government, and a diversified range of products, as reductions in U.S. military spending forced many contractors to cut jobs. Kongsberg, a partner in the Pentagon’s F-35 jet program, gets about half of its revenue from commercial sales and produces specialized products such as a remote weapons- control system.

“Kongsberg Gruppen is much more niche-oriented compared to the other players,” said Eirik Ronold Mathisen, an analyst at DNB Bank ASA in Oslo, the Norwegian capital, who is among 12 of 14 analysts recommending investors buy the stock. “They are much less influenced by the general, overall spending on military equipment.”

The Norwegian government’s 50 percent stake in the company increases the stock’s price stability, Ronold Mathisen said in a phone interview.

Kongsberg Shares

Kongsberg, based in the town of the same name, returned 2.8 percent in the five years through June 29, after adjusting for price swings, better than all but one of the companies in the BGOV Top 70 Contractors Index. Goodrich Corp. (GR), the best performer in the index, was excluded from the ranking because its performance reflected a one-time event, a takeover offer by United Technologies Corp. announced last year that pushed the stock higher. The transaction is pending.

Kongsberg’s shares produced a 105 percent total return in the period, compared with a 7.1 percent return by the Standard & Poor’s 500 Aerospace & Defense Index. (S5AERO)

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.

Niche Provider

Kongsberg plans to increase its defense sales even amid lower international spending on weapons, Walter Qvam, Kongsberg’s chief executive officer, said yesterday in a telephone interview. The company increased its staff by about 15 percent in the past 14 months, he said.

“It is important to remember that we are a niche technology company and not a huge defense supplier,” Qvam, 59, said. “If you select the right products and have leadership in those products, then there is a huge growth potential even in a shrinking market.”

The Norwegian government has sought opportunities for Kongsberg in the Lockheed Martin Corp. (LMT) F-35 jet, the Pentagon’s biggest weapons program. Norway has invested $700 million to develop a Kongsberg missile that may be used on the fighter jet and plans to spend $300 million more, Bjorn Bjune, vice president for business development at the company’s defense systems unit, said last year. The contractor also makes components for the jet’s rudder.

Norway last month ordered two of the 52 F-35 jets it plans to buy. The program will be the largest public procurement in the country’s history, Espen Barth Eide, Norway’s defense minister, has said.

F-35 Missile

While the U.S. hasn’t committed to buying Kongsberg’s F-35 missile, U.S. Secretary of Defense Leon Panetta supports the integration, the Norwegian government said June 15.

Founded in 1814, Kongsberg’s ties to the U.S. Army date to the late 1800s, when its Krag Carbine was used by Theodore Roosevelt’s Rough Riders during the Spanish-American War over Cuba’s independence, according to the Theodore Roosevelt Association’s website. Roosevelt himself didn’t use a Krag, going to war instead with a Winchester Model 95, according to the website.

The war in Iraq led to a boom in demand for Kongsberg products. The company was selected to supply an electronic system that allowed troops to fire roof-mounted weapons from inside combat vehicles, providing protection from enemy fire. It received $2.25 billion in U.S. orders for the system in the past five years, according to data compiled by Bloomberg.

Kongsberg received orders for about 11,500 of the remote weapon stations from the U.S., said Aleksander Nilsen, an analyst with ABG Sundal Collier Holding ASA in Oslo. That helped the company almost double its revenue to $2.7 billion last year from $1.5 billion in 2007.

Afghanistan War

Sales of remote weapons-control systems face pressure as U.S. demand for ground vehicles wanes following the end of the war in Iraq and the decision to withdraw troops from Afghanistan by the end of 2014.

The U.S. Army in February 2011 said it planned to hold a new competition for remote-firing systems and would buy as many as 18,000 units. The Army changed course in September, saying it would buy about 3,000 stations at an estimated cost of $970 million over five years.

The Pentagon plans to cut $487 billion from previous budget projections in the next decade, and $500 billion in additional cuts may begin in January if no agreement on the deficit is reached.

The reduction in U.S. military spending hurt Kongsberg investors in the past year. The stock lost 23 percent, including dividends, in the 12 months ended last week, compared with a loss of 0.9 percent in the Standard & Poor’s 500 Aerospace & Defense Index.

Low Valuation

The decline in Kongsberg’s share price reflects concern that lower U.S. military spending will hurt revenue, said Kenneth Sivertsen, an analyst at Oslo-based Arctic Securities ASA. The company’s low valuation may not be warranted because Kongsberg is less dependent on defense spending than most of its peers, he said.

“Kongsberg still has a maritime business which is close to half its earnings, and that’s its most important growth area,” Sivertsen said.

Sales of maritime products such as a system that keeps ships in position by calculating the force needed to counter the pull from wind and waves generated $186 million, or 51 percent, of Kongsberg’s operating income last year. That’s an increase from $159 million, or 44 percent, the prior year, according to data compiled by Bloomberg.

By comparison, some of the contractors that produced the worst risk-adjusted returns in the group depend on the U.S. government for a greater share of their sales.

Worst Performers

Alliant Techsystems Inc. (ATK), the largest supplier of ammunition to the Pentagon, gets 65 percent of revenue from the U.S. government. It produced the second-worst risk-adjusted return in the group in the past five years, ahead of Rome-based Finmeccanica SPA.

SAIC Inc. (SAI), which provides engineering services, gets 90 percent of revenue from work funded by the U.S. government and had the fifth-worst risk adjusted return.

Sivertsen recommends buying Kongsberg shares and has a price target of 140 kroner for the stock, 22 percent higher than yesterday’s closing price of 115 kroner on the Oslo Stock Exchange.

The reduction in planned U.S. purchases of remote weapon- control stations may be offset by demand from other countries, Nilsen said.

“I still see growth, but I think the U.S. will be a smaller portion of total revenues within that area,” he said.

To contact the reporter on this story: Nick Taborek in Washington at ntaborek@bloomberg.net

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net; Stephanie Stoughton at sstoughton@bloomberg.net

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