Budget Woes Are No Match for These Titans
It seems like the punches keep coming for the defense sector, as lawmakers once again look for ways to cut the Pentagon's spending. Despite an anticipated $315 billion in defense cuts already laid out over the next decade, some legislators now argue that this still isn't enough. Others argue that cutting defense further will leave thousands out of work, and the United States without adequate defense. What does this debate mean for your defense investments?
Trimmin' the fat
It's no secret that defense players Boeing (NYS: BA) , and Lockheed Martin (NYS: LMT) have faced intense scrutiny to control costs associated with contracts they've won. Rumors suggest that Boeing's KC-46 tanker contract may already be running over budget, which would likely force Boeing to eat that extra cost at the expense of its own profits. Skyrocketing costs for Lockheed's F-35 contract has some lawmakers like Sen. John McCain looking for ways to cut the program if Lockheed can't get its budget back under control.
With contracts like the above facing pressure to control spending, it's clear that lawmakers are taking defense cuts quite seriously, and cutting defense fat wherever possible. This trend will likely continue, forcing defense players like General Dynamics (NYS: GD) , Northrop Grumman (NYS: NOC) , Textron (NYS: TXT) , and L-3 Communications (NYS: LLL) , to become leaner and meaner in order to win new contracts.
It's all in the numbers
Whatever the outlook for defense spending, defense stocks have already been factored in the likelihood of forthcoming cuts. That's great news for investors looking for a bargain on defense stocks.
For example, L-3 Communications is trading at seven times earnings; both Northrop Grumman and General Dynamics are trading at eight times earnings; Lockheed is trading at nine times earnings; and Boeing is trading at 13 times earnings. That's well below the 15-times-earnings cutoff that we Fools like to see. Additionally, all of the above defense companies listed pay dividends -- something every investor likes.
Wrapping it up
Defense companies may suffer from pressure on Capitol Hill to cut defense spending, but that's no reason to back out of defense investing. If anything, now is the time to get in at rock-bottom prices.
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