With the war on terrorism, most defense stocks have rocketed up. Even tiny United Industrial (UIC ) has taken wing. The company, which makes the U.S. Army's Pioneer unmanned aerial vehicle and training and electronic test systems, is little-known on Wall Street. Soaring from 13 on Sept. 10 to 20 in early October, the stock drifted down to 15 by mid-December. But it has since headed up--to more than 18. This latest upturn, however, may be due to nonmilitary events: takeover talk.

Steel Partners II, a New York investor group, which owns 10.5% of United, is pushing for a sale. Reliable sources say Steel has talked to an investment bank about finding a buyer: At yearend, an agreement expired that barred Steel Partners from trying to change management control at United. Steel Partners' CEO Warren Lichtenstein, who sits on United's board, had signed the pact on Mar. 7, 2001.

The scuttlebutt is that two major defense contractors are interested, and that a buyout price could be 22 to 28 a share. Charles LaLoggia, editor of The SuperStock Investor in Rochester, N.Y., says United would be "even more enticing if it sold its nondefense businesses, which are a drag on results." United produces equipment for steam heating and generating plants and also makes electric trolley buses. Selling these units would boost earnings and add to its working capital of $5 a share, he says. The defense business accounts for 78% of sales. Value Line analyst Mario Ferro expects United to earn $1.10 a share in 2002 on sales of $310 million, up from an estimated 75 cents in 2001 on sales of $295 million. United and Steel Partners didn't return calls.

By Gene G. Marcial

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