By now you've probably heard the news: The government is a bunch of fighting children who squabble over anything and everything. I mean, really. Can we get them a pacifier or something?
The constant tantrums wouldn't bother me so much if they could at least get one small thing done: pass a budget. Without a budget resolution, the following companies, and their stock, are in a state of limbo, with everyone wondering: Will sequestration kill defense? Or is that fear shortsighted, especially given growing conflicts?
True, this company has some issues ...
For a while now, I've questioned Boeing's (NYSE:BA) ability to deliver its biggest contract, the KC-46 tanker, on time and on budget. Well, as predicted, Boeing went over budget and, because of the fixed-price nature of the contract, was responsible for the cost overrun.
In addition, Boeing plowed through its management reserve fund -- funding specifically set up to solve problems during development -- which means Boeing may have to pay for any added expenses. However, that's not a huge problem, as Boeing expects to make that up, and more, when it moves beyond the development phase and starts production.
But here's the kicker -- if sequestration goes into affect, it could have a direct impact on the KC-46 tanker. Program manager Maj. General John Thompson stated: "Depending on how sequestration is implemented, I might have to break my fixed price contract that I got a really good deal on. ... I don't want to break my contract, and I'm fearful sequestration may break it." Yeah, I'm guessing Boeing doesn't want to break the contract, either, as it's counting on that revenue.
The bad news keeps coming, as the FAA just grounded Boeing's 787 Dreamliner because of continuing problems. That's also bad news for Rockwell Collins (NYSE:COL) and General Electric (NYSE:GE). Rockwell supplies avionics equipment for the 787 and is expecting to increase production from four planes to 10 by the start of its fourth quarter, and GE supplies engines for the 787.
With sequestration threatening these companies' revenue, commercial business is more important than ever to keep revenue where investors like it -- increasing. And considering Rockwell stated that if sequestration goes into effect, it could threaten jobs and revenue by $120 million for its 2013 second half, the Dreamliner's clipped wings are unwelcome news -- although as of yet, Boeing hasn't changed shipment plans.
Bye-bye, revenue and jobs?
Rockwell isn't the only defense company to go on record saying sequestration could threaten revenue and jobs. Lockheed Martin (NYSE:LMT), L-3 Communications (NYSE:LLL), and United Technologies' (NYSE:UTX) have all said sequestration could be catastrophic to their business.
Lockheed has reduced management by 25% and said in a statement early this month that "[u]ntil sequestration is permanently eliminated, there will be an overhang on our industry that stifles investment in plant, equipment, people, and future research and development essential to the future health of our industry." L-3 said that if sequestration goes into affect, it expects to see a 5% decrease in revenue, on top of the 2%-3% decline it already expects to see during 2013, and United Technologies' CEO, Louis Chenevert, said he expects sequestration to cost his company an addition $1 billion in revenue, on top of the anticipated $1.2 billion revenue cut. In other words, sequestration is to defense what kryptonite is to Superman.
Bad news for the world; good news for defense
It's easy to see how investing in defense companies sounds risky. But guess what? Defense companies are essential to military readiness, and while the wars in Iraq and Afghanistan have ended, or are "winding down," there are a host of other issues promising a continued need for defense.
One of the big issues cropping up is Africa. While the U.S. has made headway in Afghanistan, al-Qaida has pushed farther into Africa. In particular, Mali has become a hotbed for Islamic activity, and there is now fear from the West and Africa that Mali could become a launch point for terrorist activity -- the Algerian gas plant seizure that killed 37 foreign hostages being a prime example.
Consequently, France sent troops to Mali and expects backing from the U.S. and Europe. In fact, Secretary of State Hillary Clinton said the threat in Mali is "a very serious, ongoing threat" and that "there is going to be a struggle in this region, [and] the United States has to be prepared."
Moreover, there are 60 countries currently involved in war, and a number of those wars involve terrorist-led groups. Thus, there's the potential to become threats to America.
It'd be great if everyone could just get along, and wars would cease to be a problem. But that's not the way the world works. And where there's a threat, there must also be force. That's why we'll always need defense companies, which makes them perfect for long-term investments. So even if sequestration goes into effect and wreaks havoc on defense, it won't kill it. In fact, if sequestration causes a mass-selling panic on defense stocks, Yours Truly will be one of the first in line to stock up at reduced prices.