In the world of defense contracting, even systems at the top of the food chain may not be immune to predators. As the conflict in Iraq continues to consume military resources, investors should be aware that the major defense outfits could be vulnerable.
The
New York Times reported today that the Pentagon is planning sharp cuts in the F/A-22 Raptor fighter jet program. The Air Force is expected to buy 277 Raptors, but that number could be scaled back to 160, according to one analyst quoted in the article. That would be bad news indeed for Lockheed Martin (NYSE: LMT), the prime contractor for the plane, as well as for Boeing (NYSE: BA), which is also providing parts for the aircraft.
Of course, the reduction is far from guaranteed. Weapons programs are notoriously difficult to scale back because such revisions must be made through Congress, whose members often staunchly defend programs that benefit their constituents. Still, the F/A-22 seems like an easy target. Like the Comanche helicopter, which the Pentagon canceled in February, the F/A-22 has been in development for two decades, and costs have grown. What's more, the Raptor suffered an embarrassing episode earlier this month when one crashed during takeoff.
The Raptor's peril may be a signal of the Pentagon's growing willingness to rethink other programs. Some projects seem relatively secure, such as Lockheed's Joint Strike Fighter, Northrop Grumman's (NYSE: NOC) Global Hawk, and Boeing's missile defense work, although even these could see some cuts. Other programs could be much more vulnerable. Boeing's V-22 Osprey plane, for instance, has a troubled history and has been criticized by many defense analysts.
For now it appears the war in Iraq will be the Pentagon's first priority. In the current budget climate, costly next-generation programs seem likely to lose out to the immediate needs of the troops.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
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