(Original Publication Date: October 25, 2001)

US electronics group ITT could be a beneficiary of increased federal spend on both defence and air traffic control in the wake of the recent terrorist attacks. Unfortunately, much of this good news has already been factored into the share price.

In the last fortnight, ITT Industries (NYSE: ITT) the New York-based electronics group has had a downgrading from analysts - from strong buy to market outperform. With the majority of stocks expected to fare badly post September 11th, the new rating still reflects the relatively strong position that certain niche companies like ITT find themselves in.

It is not a defence stock as such, but like a number of other companies ITT has benefited recently from its close links with the US military and other bodies in America that are now being re-categorised by the markets.

Just weeks before the terrorist attacks on the US, ITT was consolidating itself as a leading supplier to the US military. In August, the company won a $77m contract with the US Air Force to supply a command and control switching system at 19 locations around the world, including the White House. The events of September have put security issues to the forefront in the US, no more so than security at 1600 Pennsylvania Avenue itself.

It's still too soon after those tragic events to be talking about an ill wind. But as fate would have it, ITT is also in the business of manufacturing and developing control communications for air traffic control needs.

In July, ITT was awarded a $580m contract by the US Federal Aviation Authority for new air traffic control (ATC) radios to improve the US National Airspace System. The technology includes next generation communication systems that incorporate the ability to transmit voice and data link communications simultaneously.

The contract involved the rollout of 37,000 new radios, a process that had just begun as the attacks on the World Trade Centre were carried out.

The upshot is that ITT has not been badly bruised by the markets over the last six weeks. The nature of much of the revenue stream at the group is encouraging for the short-term health of the business. The US Air Force and the US FAA are not going bust any time soon, so the prospect of a scaling back of these revenues does not apply.

Just how much more 'guaranteed' revenues ITT can attract is a different matter. But being a large supplier to the US Federal State is a measure of insulation against current economic difficulties that reassures the market.

In his final year in office, former President Bill Clinton ran a defence budget of $290bn. George W Bush, meanwhile, has proposed a defence budget in 2002 of $329bn - or a healthy 13.4% increase on the previous year.

ITT has already demonstrated a successful ability to win contracts from the current administration. With an increased US Federal spend going forward, it is well placed - to use a euphemism - to benefit accordingly.

So while traditional defence stocks, such as Boeing, have been dealt hammer blows by the terrorist attacks, niche companies like ITT involved in high-tech avionics could end up doing quite well.

A problem for investors, however, is that the market seems pretty aware of this situation. At its current level of $48, ITT is trading at an all-time high.

The climb in the share price has been a steady, but inexorable one for some time. Defence stocks went into free fall after the collapse of the Soviet Union at the beginning of the last decade and it remains to be seen how long the market's current love-in with them lasts.

But ITT scores in that it is not exclusively a defence stock. Its networking systems division last week announced a strategic partnership with Home Director , the supplier of domestic communications systems. Between them, the partners will manufacture, develop and sell structured wiring home networking equipment for new and renovated homes.

New housing starts in the US actually rose last month. Over half of all new homes to be built in the US over the next three years are expected to include new wiring infrastructure for Internet, cable and satellite services. Expect ITT products to feature in a healthy proportion of these.

Looking out over a longer timeframe, the proportion of new houses being built incorporating facilities like these could rise to 100%.

At $48, ITT will have a year-end price/earnings ratio of 15.5 times if it reaches its earnings per share targets. Earnings are expected to grow by 9.3% in 2002 - which could prove to be a difficult year as ITT's customers include many 'Fortune 100' companies. We can't help thinking that ITT is just a little pricey at the moment, but is a stock worth keeping an eye on over the coming months.