Defense Stocks Teeter on Budget Ax’s Edge

by Susan J. Aluise | April 18, 2011 12:16 pm

Before Monday’s broad market selloff, shares of major U.S. defense contractors had shown some bounce after taking a hit on the prospects of staggering cuts in defense spending.

Investors initially responded to President Obama’s threat last week to carve $400 billion from the defense budget over the next 12 years by selling off big defense names like Lockheed Martin (NYSE:LMT[1]), Northrop Grumman (NYSE:NOC[2]), Orbital Sciences (NYSE:ORB[3]), Raytheon (NYSE:RTN[4]) and General Dynamics (NYSE:GD[5])

But by Friday, stocks were bouncing back, as investors perhaps remembered that gridlock in Washington is a far more likely outcome 18 months before a presidential election.  

Defense contractors have been on notice for months that, as Defense Secretary Robert Gates said, “the culture of endless money” that has been feeding the industry since 9/11 would soon be coming to an end. 

Still, Citigroup Analyst Jason Gursky believes the budget plan put forth by House Republicans, which would limit defense cuts to the $178 billion Gates already has identified, has enough bipartisan support to keep defense contractors – and their investors – in the money.

So far, the Pentagon’s weapon system cuts include:

But that’s not close to the savings Obama and many so-called “Tea Party” Republicans are looking for.  And getting defense cuts anywhere close to $400 billion will require taking a meat cleaver to high-ticket weapon procurement projects.  Here are some additional targets that could wind up in the crosshairs:

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

Endnotes:
  1. LMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=LMT
  2. NOC: http://studio-5.financialcontent.com/investplace/quote?Symbol=NOC
  3. ORB: http://studio-5.financialcontent.com/investplace/quote?Symbol=ORB
  4. RTN: http://studio-5.financialcontent.com/investplace/quote?Symbol=RTN
  5. GD: http://studio-5.financialcontent.com/investplace/quote?Symbol=GD

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