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

http://www.fool.com/investing/general/2014/02/17/why-the-pentagon-desperately-needs-defense-contrac.aspx

Rich Smith
February 17, 2014


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.<