Why the Pentagon Desperately Needs Defense Contractors to Keep Their Mouths Shut


Source: Congressional Budget Office.

"Going forward from '14, '15 ... hopefully, we've hit the bottom. If not, I think we're very, very close. ... So I'm, I'll say cautiously optimistic ... to see some growth in the not too distant future."
-- Lockheed Martin CFO Bruce Tanner 

"The major slide is behind us. ... I think we're getting close to the bottom."
--General Dynamics CEO Phebe Novakovic 

"Overall, we're pleased with the 2014 budget outcomes for our programs."
-- Northrop Grumman CEO Wesley Bush 

Dear defense contractors: Will you please shut up? Thanks a lot. -- The Pentagon
In just a couple of weeks, the Obama administration is expected to release its fiscal 2015 budget proposal, which among other things will outline the administration's view of where defense spending is headed over the coming year. As you can tell from the CBO chart up above, it's going to be hard to make a case for spending to go "up," given the U.S. government's sustained and continuing budget deficit.

To the contrary, for the Pentagon to get the funding it needs to pay its servicemen, buy essential weapons systems, and undertake other tasks for the nation's security, it's going to have to make some tough arguments: That defense spending has been cut drastically already. That belts have been tightened, cost-cuts implemented, defense contractors squeezed. And that it's time to loosen the money spigots again.

But as DefenseNews.com reports in a column this past week, America's defense contractors aren't making the Pentagon's job any easier, what with all the happy-talk they've been spouting lately. Quoting Pentagon acting industrial base chief Elana Broitman, DN notes: "We've gone through a lot of the year-end reports, and a lot of the larger companies in particular are reporting that while they've seen some of their sales take some small hits ... we're really at the nadir of the pressure on their sales, and that things are going to be really rosy from there."

A lone voice, crying in the wilderness
Not everyone's looking at the defense budget through rose-colored glasses, of course. After Boeing's (NYSE: BA  ) earnings report last month, company CEO Jim McNerney warned that the recent Congressional budget compromise really only "delayed the full impact of sequestration by 18 to 24 months by about a half ... so sequestration still lurks out there," and budgets are still tight.

But if Boeing's boss is worried, he's in the minority. Lockheed Martin (NYSE: LMT  ) , General Dynamics (NYSE: GD  ) , Raytheon (NYSE: RTN  ) , and Northrop Grumman (NYSE: NOC  ) -- if you go through the transcripts of what the CEOs and CFOs at these companies have been telling their investors these past few weeks, it's basically a story of a minor slowdown in revenue leading to a temporary slump in profit. According to most of Boeing's peers, the hard times will soon end, and defense spending will swing up again.

That is exactly not the message the Pentagon wants Congress to hear. Broitman again: "For us to be able to tell the story of what the sequester does to the defense environment, it's harder when there are good profits at some of the larger companies."

What it means to you
Investors so far have been pleasantly surprised at how little the sequester has bitten into their companies' profits. Last year, all five of the big defense contractors named above "beat" analyst earnings estimates with a stick -- every single quarter, and usually by double digits. (Other defense contractors have done even better. Last time Navy shipbuilder Huntington Ingalls reported earnings, for example, it exceeded expectations by 66%.)

But the share price performance at these companies has put even their profits performance to shame. The "Big 5" named up above have seen the value of their stocks rocket an average of 75% over the past year. Clearly, investors are still buying what the defense CEOs are selling. But considering that their No. 1 customer, the Pentagon, is telling us, maybe it's time to inject a bit of caution into this stock rally. 

Invest in an even bigger gun
Defense contractors have had a great run, but maybe it's time to load up on even bigger stock market gun. U.S. News and World Report says this trend "will drive the U.S. economy." And Business Insider calls it "the growth force of our time." In a special report titled "America's $2.89 Trillion Super Weapon Revealed," you'll learn specific steps you can take to capitalize on this massive growth opportunity. Act now, because this is your shot to cash in before the fat cats on Wall Street beat you to the potentially life-changing profits. Click here now for instant access to this free report.


Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 17, 2014, at 11:43 AM, ugo wrote:

    The pentagon budget is the last one not subject to scrutiny and accountability. It has been framed as unpatriotic to mess with. That is why it is a slush fund, full of political paybacks, fraud, waste, etc. What other budget would a congressman blatently fight to have the US keep buying airplane engines that the military did not want without fear of repercussion?

  • Report this Comment On February 17, 2014, at 12:19 PM, theredbob1 wrote:

    nearly all of these companies listed have at least 80% of their business from the government.

  • Report this Comment On February 17, 2014, at 1:57 PM, ensabada wrote:

    hang on babalouie........i didn't think the government created jobs but only the GODS/CREATORS (read: job creators) in the private sector did that....ah, the military-CONGRESSIONAL-industrial complex

  • Report this Comment On February 17, 2014, at 8:32 PM, quasimodo007 wrote:

    big huge giant Black hole Projects and the evil NSa and evil CIa that the evil US military TOP brass who Only Protect Rapist who Sexual assault US Military Women and Civilian Women want to RIP OFF Americans TAX Payers .

    Really wait for the ISRAELI steal the Plans and give it to the Russian and they can built it Cheaper and Better . Save TAX Payers Dollar .

    THE US needs to rebuilt US Infrastructure, Clean Drinking water by cleaning up all the Polluted water and Air from the Evil koch brothers Pollutions, and big US mafia OIL. Feed US Homeless Families ,Veterans, more Food stamps for the POOR take care of Americans first.

  • Report this Comment On February 19, 2014, at 8:41 AM, ilsm50 wrote:

    FY 15 is not ebing cut, other than growing as fast as then general economiy. It will be in real dollars nearly what the pentagon spent in the cold war.

    Which is too much!

    The area to cut is services contracts. The US and Boeing cannot afford the pentagon doling out $200B a year to have its programs' "windows washed" by high paid techies.

    Twice too many beltway bandits cutting into Lockheed and Boeings take.

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