Crafting a budget in Congress has been compared to a knife fight. Yesterday, they broke out the meat cleavers.
Two years ago, Defense Secretary Robert Gates led a charge to cut $100 billion in Pentagon funding. He hacked and slashed until both Lockheed Martin's (NYSE: LMT ) F-22 Raptor fighter jet program and Boeing's (NYSE: BA ) C-17 transport lay in tatters. The cuts continued, as the Boeing- and SAIC (NYSE: SAI ) -led Future Combat Systems initiative fell by the wayside. Then, in quick succession, fell the airborne laser project, in which Raytheon (NYSE: RTN ) and Northrop Grumman (NYSE: NOC ) participate. Also, General Electric's (NYSE: GE ) alternate F-35 engine, General Dynamics' (NYSE: GD ) amphibious tank, and on and on. $400 billion in funding, gone.
But it's over now, right?
We thought that was the end of it. But within a year, a group called the Sustainable Defense Task Force upped the ante and demanded $1 trillion in cuts. As I said then: "We're more likely talking cuts of somewhere between $100 billion and $1 trillion over the next decade. This is not good news for investors in defense companies. Revenues will drop, valuations will fall, and industry consolidation is likely ..."
Little did I realize that was the best-case scenario. Yesterday, Rep. Barney Frank (D-Mass.) -- an early backer of SDTF -- began sharpening his cleaver, and suggested that $100 billion a year may not be quite enough after all. Frank believes the United States could actually "afford to cut $200 billion a year." Thus, he appears to be targeting a nice round half-trillion-dollar target for annual defense spending -- about a 29% reduction from the current bar bill.
Disaster!
Not so fast. This sounds like an apocalyptic prediction for defense investors. On the plus side, Frank says Congress should preserve funding for programs "that are already up and running." He believes the cuts are achievable through a combination of reducing garrisons in Europe and elsewhere, bringing troops home from the Middle East, and ... one more thing: "Let's not come up with new ones we don't need," he said.
Hawk that I am, I find it hard to argue with that suggestion. The trick will be agreeing on which new programs we don't need. Ladies and gentlemen, start your knife sharpeners -- and whittle down your growth estimates.
RSS Headlines
Fool UK