Capital Commerce: Defense companies no longer darlings
The days of ballooning defense budgets are coming to an end. And cuts likely in next year's DOD budget could be bigger than the modest $10 billion-to-$15 billion trim that many policymakers and members of Congress have been expecting.
After meeting recently with several Pentagon planners, UBS analyst David Strauss is predicting cuts that could be considerably higher, though he's not offering a number. But with mounting bills to pay for the war in Iraq and the aftermath of the Gulf Coast hurricanes, the Pentagon's $420 billion budget is one likely source of funding. The Office of Management and Budget is expected to issue guidance to the Defense Department on the size of any cuts around November 21. DOD will then probably issue a program budget decision, or PBD, by mid-December, specifying where cuts need to occur.
In a note to clients, Strauss predicts that most will come from new-weapons programs. Likely targets: those that are over budget or behind schedule, such as the F/A-22 and F-35 fighter jets, space programs, the Army's future combat system, and the Navy's new DD(X) destroyer. As a result of the cuts, stock prices for contractors such as Lockheed Martin, Northrop Grumman, Raytheon, and General Dynamics could take a hit. The military services could fence off their programs a bit by moving expenditures to the future instead of simply canceling portions of them. But pressure to cut will remain. Strauss advises: "Expect OMB to be back looking for more this time next year."