Defense Contractors Under Attack?

Few would argue that the Iraq War has been costly, both in terms of lives lost and dollars spent. But while the price of operations in the Middle East have been well-publicized, a few more recent stories have shed light on the toll the war is taking on ground forces' equipment. It's a story investors should be following.

A Washington Post article last week revealed that the U.S. likely will have to invest $17 billion to $19 billion per year for the next several years just to replace, repair, and upgrade Army and Marine equipment. By comparison, the Army spent $2.5 billion to $3 billion before the war on such upkeep. Notably, to keep up military readiness, the U.S. will have to hike spending, no matter what happens to Iraq policy.

Meanwhile, The Wall Street Journal reports today that the Pentagon recently cut funding for projects involving armored vehicles, trucks, and radios. The Journal's analysis shows that in recent years, the Army has received 16% of the funds spent on weaponry, compared to 36% for the Air Force, and 33% for the Navy.

So what does this mean for investors? Well, the immediacy of the ground forces' equipment problem almost certainly means that the Army and Marines will get more funding. But incoming Democratic legislators have pledged fiscal discipline. This appears to set the stage for pain at some defense contractors.

Granted, Democrats arguably could have trouble making cuts for fear of being called "weak on defense." However, Democrats could easily turn such cuts to their political advantage. Since budget reductions in expensive weapons programs likely would be paired with increases for ground equipment for soldiers, Democrats could charge Republican dissenters with not supporting the troops.

Less proven programs, and those with exotic technologies designed to counter threats that won't materialize for a couple decades, such as a more militarily capable China, seem vulnerable to hits. Among these are Boeing's (NYSE: BA  ) airborne laser and Raytheon's (NYSE: RTN  ) new DDG-1000 destroyers. But larger core items like Lockheed Martin's (NYSE: LMT  ) F-35 also might be pared back.

The situation isn't bad for all contractors, especially those supplying Army and Marine equipment. General Dynamics (NYSE: GD  ) , maker of the Abrams tank, is in an enviable position, while DHB (NYSE: DHB  ) , a bulletproof vest maker, likewise appears to be in good shape. In any case, the defense industry could be in for a shakeup.

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Fool contributor Brian Gorman does not own shares in any the companies mentioned.


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