U.S. President Barack Obama's 2015 budget, officially set for release today (Tuesday), looks good for defense stocks -- for the most part.
Based on preliminary details that members of the Obama administration began discussing last week, defense contractors won't be touched by most of the planned spending reductions.
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Investing in Defense Stocks: Why Lockheed Martin (LMT) Is Too Big to Fail
Last year when Congress formed its much-lauded "Supercommittee" to sort out America's debt crisis, there was a lot of handwringing about draconian budget cuts.
But true to form, on the eve of an election year, our politicians did nothing and the sequestration clock began to tick.
In essence, they made the bold move to kick the can down the road.
The problem is if the clock is allowed to keep ticking, those same draconian cuts will happen anyway.
No industry is more aware of this than the defense sector.
For them it is literally like turning a battleship - the major players need a lot of lead time to readjust their bearings.
So it's no surprise that the defense sector, which has a budget bigger than the combined defense budgets of at least the next 30 countries in the world, is worried more than most about significant cuts.
And when corporate execs worry, so does Wall Street.
But somehow, I think the military industrial complex will survive. For investors, it will be all about picking the right players.
Investing in Defense Stocks: Lockheed Martin's Big AdvantageOne of them is Lockheed Martin (NYSE: LMT).
As the great military strategist Sun Tzu once said, "Opportunities multiply as they are seized."
Today, there is no company better at seizing opportunities than Lockheed Martin.
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Defense Stocks Under Fire From Super Committee Budget Cuts
Defense stocks have become collateral damage in the battle raging in Congress over how to reduce the deficit by $1.2 trillion over the next decade.
Any mix of cuts and tax increases will certainly include significant reductions in defense spending. And if the Congressional "super committee" fails to come up with a plan, an automatic "sequestration" will kick in, which calls for half of the money -- $600 billion - to come out of defense.
That will come on top of $350 billion in defense spending cuts (also stretched out over the next decade) that were part of this past summer's agreement to raise the debt ceiling.
No wonder the major defense contractors are concerned.
"The defense market is shrouded by the uncertainty," Jay Johnson, Chairman and CEO of General Dynamics Corporation (NYSE: GD) told Politico. "We continue to have no special insight as [to] what the super committee will determine ... or what will happen to defense budgets beyond 2012."
While the deadline for the 12-member bipartisan super committee to vote on a plan is Wednesday, it must submit that plan to the Congressional Budget Office today (Monday).
Talk on Capitol Hill last week was anything but optimistic.
Super committee member Sen. Max Baucus, D-MT, was among those expressing dismay at the lack of progress.
"We're at a time in American history where everybody's afraid - afraid of losing their job - to move toward the center. A deadline is insufficient," Baucus told The Washington Post. "You've got to have people who are willing to move."
The urgency of doing something about the federal deficit was underscored last week when it officially passed the $15 trillion mark.
With defense spending already on the decline as a result of the withdrawal of U.S. military forces from Iraq by year's end and the continuing drawdown of forces from Afghanistan, the defense industry has already started to feel the pain.
Lockheed Martin Corp. (NYSE: LMT) laid off 6,500 workers over the summer; its stock is down more than 5% in the last six months. Northrop Grumman Corp. (NYSE: NOC) let 800 people go just last month, and its stock has fallen nearly 12% in the past six months.
Profits at RiskAn adjustment was coming even without a debt problem. While the United States was embroiled in two major overseas conflicts, the defense industry got fat - profits grew from $6.7 billion in 2001 to $24.8 billion in 2010.
Government spending on defense has nowhere to go but down -- the only question is by how much.
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