You've probably heard the news: Sequestration is the new reality and the world as we know it is ending. OK, that's a little dramatic. The world isn't ending, but sequestration is being implemented. That means across the board cuts are coming to a defense contractor near you. So what does this mean for investors?
Here's what you need to know: There will be an additional $500 billion cut from defense spending over the next nine years, bringing total defense spending cuts to around $1 trillion. That means programs will be cut, and even "essential" programs such as Boeing's (BA 1.01%) KC-46 tanker contract and Lockheed Martin's (LMT -0.10%) F-35 fighter contract, could feel the pinch. It's going to be unpleasant. Employees will lose their jobs. Profits will be negatively affected, and as a result, people may panic and defense stocks could drop. Also, in the long run, it's probably not going to make a lick of difference to big defense contractors.
The thing is, defense companies have been preparing for this possibility. Yes, they've petitioned Congress to do what's necessary to avoid sequestration -- they don't want their businesses to suffer, but they also saw the writing on the wall and started tightening their belts a while ago. Plus, they've been focusing more on commercial business, so they're not completely dependent on government spending.
For example, both Northrop Grumman (NYSE: NOC) and General Dynamics (GD 0.51%) have partnered with MIT and a number of other prestigious universities to increase Cybersecurity initiatives in order to combat the growing threat to both commercial and government agencies, and both Lockheed and Boeing have a huge stake in commercial aircraft, although recent news on Boeing's Dreamliner isn't great.
But, more importantly, and I've said this many times before, the military can't function without defense contractors. They need the ships, the planes, the missile launchers, etc. in order to do their job. And America needs the military -- just look at what's going on with North Korea and Africa for proof. Consequently, the big defense players aren't going anywhere. The little defense guys? Yeah, it could be a rough ride. But the big-uns? Not so much. A little worse for wear for a while, but in the end, they'll still be alive and kicking. Although to be honest, I'm kind of hoping people do panic and defense stock prices tank, so I can stock up at discounted rates. Tune in tomorrow for my analysis of how sequestration could impact defense dividends and what to look for in the future. You don't want to miss it!