On May 22, the U.S. House of Representatives passed H.R. 4435, "The National Defense Authorization Act for Fiscal Year 2015." The good news is that if this bill passes the Senate, and the President signs it into law, defense contractors will score a number of wins. The bad news is the White House seems none too pleased with the current bill.
Win some, lose some
When it comes to procurement, the Department of Defense requested $90.6 billion for fiscal year 2015. While that's still a significant amount of money, it's a decrease of $3 billion from the amount authorized for fiscal year 2014. More importantly, some of the ways that the DOD has proposed meeting this number are by cutting funding for Boeing's (NYSE:BA) EA-18G "Growler" attack plane, cutting the Navy's shipbuilding and conversion budget, retiring Lockheed Martin's (NYSE:LMT) U-2 spy plane, reducing missile procurement, and retiring the A-10. Clearly, none of these proposals are great news for defense contractors who not only benefit from selling these weapons, but also maintaining them.
However, the good news for defense contractors is that the House believes that $90.6 billion isn't enough for procurement, and recommends authorization of $91 billion. Further, H.R. 4435 specifically rejects the DOD's proposals, and reinstates funding for the Growler, Navy shipbuilding, and missile procurement, and prohibits funding for the retirement of the U-2 and A-10.
The White House is unhappy
There are a number of areas where H.R. 4435 meets the DOD's requests, and aligns with the President's proposed defense program. Unfortunately, there are also a number of areas of contention. Specifically, some of the things the administration objects to are the inclusion of an East Coast missile field, and the restriction of the DOD from retiring the A-10.
Regarding the A-10, the administration states: "The Administration strongly objects to provisions that would restrict the Department's ability to retire weapon systems and aircraft platforms in accordance with current strategic and operational plans. ... Divesting the A-10 will save over $4.2 billion through FY 2019."
More importantly, the administration states, "If the bill presented to the President impedes the ability of the Administration to properly direct scarce resources for our military, or continues unwarranted restrictions regarding detainees, the President's senior advisors would recommend to the President that he veto the bill."
What to watch
Right now, H.R. 4435 has only cleared the House, so it still has to pass the Senate before it heads to the President. If it does pass the Senate, there's no guarantee that the President will sign it into law. However, if H.R. 4435 somehow manages to become law, the increase to defense procurement will be great news for defense contractors and their investors. Unfortunately, there seem to be quite a few hurdles in its way. Regardless of what happens with H.R. 4435, defense investors would do well to continue monitoring defense budget negotiations. That way they can see what programs may be cut, and which companies could see a decrease in profits. Conversely, investors can also see what programs are being funded, and which companies could see an increase in profits.