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The Trillion-Dollar Question

Mark Reeth
July 16, 2012

Editor's note: A previous version of this article incorrectly stated that sequestration would begin in June 2013, instead of in January 2013. The Fool regrets the error.

Sequestration, the automatic budget cuts for various U.S. government programs, is no laughing matter for major defense contractors. If Congress doesn't act to stop the cuts from taking place, they will begin in January 2013 and reduce the U.S. defense budget over the next 10 years by $492.3 billion. And that would be on top of around $500 billion already slashed over the next 10 years. While many government defense contractors are exposed to the budget cuts, one company that may have more to lose than any other is Northrop Grumman (NYSE: NOC  ) .

In defense of defense
Northrop Grumman, a self-proclaimed "leading global security company" and one of the biggest defense contractors in the U.S., received approximately 90.5% of its 2011 revenue from contracts with the U.S. government, including:

  • Constructing the new Ford-class supercarriers, which eventually will replace the U.S. Navy's current fleet of carriers.
  • Production of two X-47B stealth unmanned aerial vehicles, the first UAVs capable of being launched from an aircraft carrier.
  • Developing the NG-ADS, a fully autonomous early warning service for biological attacks in major metropolitan areas.
  • Streamlining the Military Health System through advanced information technology and modernization of current systems.

The diversity of products will probably be an edge for the company once the ax falls on several defense programs beginning January 2013; the problem is that it doesn't matter if the company is well diversified within one sector if that sector is about to get decimated with budget cuts.

On the attack
Several other defense contractors share Northrop's overexposure to the U.S. government; however, even when you compare Northrop Grumman's financials to those of other defense contractors, the company doesn't make a very compelling case.



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