Defense budget cuts have been in discussion for some time, and although nothing is yet written in stone, there have been some significant developments. Here's what you need to know.
The budget battle
The Pentagon has agreed to cut $450 billion over the coming decade from the roughly $7 trillion it expected to receive. Likely targets are military health care and retirement accounts, cuts in the number of troops on active duty, and a reduction in the Pentagon's planned $350 billion buy of more than 2,400 F-35 fighters, according to Time.com.
More pressing for the Pentagon is the prospect of doubling the cuts (up to $900 billion or even $1 trillion) if the Super Committee fails to come up with the necessary $1.2 trillion in deficit reductions by November 23rd. This is due to a process called "sequestration" created under the Budget Control Act that originally established the committee in August.
Sequestration would not begin until January 2013, giving Congress a full year to alter the budget (or change the law) and avoid the additional budget cuts. This provides some much needed hope for the Pentagon which has said it cannot make the additional cuts without hurting national security. According to Defense Secretary Leon Panetta, "If personnel accounts were protected, everything else would have to be cut by 23%."
Although the Super Committee is not micromanaging where budget cuts are being made, many fear the committee will try to wring more savings out of the Pentagon to help add up the numbers.
Interested in tracking trends in the defense industry? We've managed to identify six aerospace/defense stocks that have a history of outperforming their competitors on profit margins.
These are some of the most profitable companies in the defense industry -- will the market start dumping these names if defense spending is cut?
Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. BE Aerospace
3. Esterline Technologies
4. Honeywell International
6. Teledyne Technologies
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Profitability data sourced from Fidelity.