Budget Woes Are No Match for These Titans

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It seems like the punches keep coming for the defense sector, as lawmakers once again look for ways to cut the Pentagon's spending. Despite an anticipated $315 billion in defense cuts already laid out over the next decade, some legislators now argue that this still isn't enough. Others argue that cutting defense further will leave thousands out of work, and the United States without adequate defense. What does this debate mean for your defense investments?

Trimmin' the fat
It's no secret that defense players Boeing (NYSE: BA  ) , and Lockheed Martin (NYSE: LMT  ) have faced intense scrutiny to control costs associated with contracts they've won. Rumors suggest that Boeing's KC-46 tanker contract may already be running over budget, which would likely force Boeing to eat that extra cost at the expense of its own profits. Skyrocketing costs for Lockheed's F-35 contract has some lawmakers like Sen. John McCain looking for ways to cut the program if Lockheed can't get its budget back under control.

With contracts like the above facing pressure to control spending, it's clear that lawmakers are taking defense cuts quite seriously, and cutting defense fat wherever possible. This trend will likely continue, forcing defense players like General Dynamics (NYSE: GD  ) , Northrop Grumman (NYSE: NOC  ) , Textron (NYSE: TXT  ) , and L-3 Communications (NYSE: LLL  ) , to become leaner and meaner in order to win new contracts.

It's all in the numbers
Whatever the outlook for defense spending, defense stocks have already been factored in the likelihood of forthcoming cuts. That's great news for investors looking for a bargain on defense stocks.

For example, L-3 Communications is trading at seven times earnings; both Northrop Grumman and General Dynamics are trading at eight times earnings; Lockheed is trading at nine times earnings; and Boeing is trading at 13 times earnings. That's well below the 15-times-earnings cutoff that we Fools like to see. Additionally, all of the above defense companies listed pay dividends --  something every investor likes.

Wrapping it up
Defense companies may suffer from pressure on Capitol Hill to cut defense spending, but that's no reason to back out of defense investing. If anything, now is the time to get in at rock-bottom prices.

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Fool contributor Katie Spence loves it when defense companies go on sale. She owns shares of Northrop Grumman. She does not own shares of any other company. The Motley Fool owns shares of Textron, L-3 Communications Holdings, Northrop Grumman, General Dynamics, and Lockheed Martin. Motley Fool newsletter services have recommended buying shares of L-3 Communications Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On September 14, 2011, at 12:55 PM, crsecon wrote:

    " pay dividends -- something every investor likes." Actually, most companies do not, preferring to hoard cash or waste it on bad acquisitions, anything not to give shareholders a break. There ought to be a law forcing payout of earnings not actually productively used--it used to be called an excess profits tax, and of course the Super Congress would no more use it than a tax on marijuana. Logic does not reign at the stockholder level either--why buy ANY non-dividend-payer for the long haul when the discounted value of future dividends is almost certainly zero? Berkshire would have to pay out ot pay up, Buffet's trying to tax everybody else notwithstanding.

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