The clock is ticking on the grand game of chicken between the White House and Congress to avert sequestration. If politicians can’t cut a deal before March, over $85 billion in automatic, across-the-board federal spending cuts will take effect.
Some $46 billion will be axed from Defense budgets alone, and adding sequestration to existing defense cuts would result in a reduction of $1 trillion in DOD spending over the next 10 years.
Shareholders in defense companies are justifiably anxious over the impact deep, automatic defense-spending cuts will have on their portfolios. That said, investors with a longer investment horizon could profit from stocks in the sector that have solid fundamentals and business operations in high-growth markets.
Plus, it’s worth remembering two pieces of advice from Warren Buffett. First: “Be fearful when others are greedy and be greedy when others are fearful.” And second: “The lower things go, the more I buy.”
With that in mind, here are three defense stocks that have been roughed up a bit recently, but still look good for the long run — even if sequestration comes to pass.
Science Applications International Corp. (NYSE:SAI): SAIC was trading down more than 3% on Thursday after downgrades from JPMorgan and RBC Capital Markets. The engineering, systems integration and information technology firm is the eighth largest federal contractor and it receives some 90% of its revenue from government sales.
Although the headwinds facing SAIC are undeniable, the company has a few aces up its sleeve. Chairman and CEO John P. Jumper, a retired four-star general and former Air Force Chief of Staff, took the helm last year after the company paid a half-billion dollars to settle an overbilling scandal with the City of New York .
Jumper has what it takes to ensure accountability and is keenly focused on two of the sector’s biggest opportunities: cyber defense and Big Data analytics. He’s positioning the company to compete in commercial vertical markets like healthcare, where security in a cyber world is essential.
Plus, last fall, Science Applications announced plans to split into two publicly traded companies: a technical services firm and an IT solutions and communications intelligence company focused on national security, engineering and healthcare. The plan, known as Project Gemini, will open up new markets in which it can use its technology. As a single entity, SAIC is restricted by existing Defense contracts from marketing its solutions — particularly in other countries.
SAI looks undervalued too, with a PEG ratio of just 0.77 and a forward P/E of about 9. For the icing on the cake, SAI’s current dividend yield of 3.9% isn’t too shabby either.
CACI International (NYSE:CACI): CACI shares have fallen 4% since Thursday, with the company’s surprise replacement of CEO Dan Allen with former Lockheed Martin (NYSE:LMT) executive Kenneth Asbury scaring off investors. In a special call to explain the move, CACI Chairman Jack London attributed the shake-up to the need for a more aggressive business development and M&A strategy.
Aggressive might be an understatement: London believes CACI can boost annual revenues from the current $4 billion to $10 billion over the next decade. When Asbury headed up LMT’s civil business group in 2009, he won $6 billion in new orders. His focus on healthcare IT, cybersecurity and business intelligence aligns well with trends in government and commercial markets.
CACI was one of 12 prime contractors selected for a potential $11 billion contract from the Department of Homeland Security and is a big win for its logistics, C4ISR and business systems line. Plus, like its sector-mates, CACI looks cheap with a PEG ratio of 0.54 and a forward P/E of about 8.
KBR Inc. (NYSE:KBR): Shares of the engineering, construction and services company have slid 4% since last Wednesday, in part thanks to news that fourth-quarter revenue slipped 11% and profit fell a whopping 67% compared to the same quarter a year ago. Much of the blame falls on the company’s minerals and U.S. construction businesses, which offset growth in oil and natural gas operations.
Still, some of President Obama’s State of the Union priorities — particularly speeding up oil and gas permits and the “Fix-It-First” infrastructure plan — play into KBR’s strengths. The company recently won a construction management contract from Abu Dhabi Airports Co. as well as a contract from Samsung for an ammonia fertilizer complex in Brazil. Plus, KBR stands to win big from growth in shale gas demand.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.