Danger! Budget Cuts Ahead!
And the results are in. For months (or was it years?) we've been hearing that cuts to U.S. defense spending were in the offing. Last week, Congress made it official, when the Senate Appropriations Committee published a hit list of major defense-weapons programs subject to a 2011 "spending freeze." In all, 580 Pentagon spending requests got slashed, as the Senate moved to slice $26 billion of the military budget. What follows are a few of the major losers from this move/
Ground Combat Vehicle
The Senate committee decimated the budget for America's next supertank. Northrop Grumman (NYS: NOC) and BAE Systems, Lockheed Martin (NYS: LMT) , Raytheon (NYS: RTN) , and General Dynamics (NYS: GD) -- winners all in the competition to build a $23.4 billion successor to the Bradley Fighting Vehicle.
Joint Light Tactical Vehicle
As we described yesterday, the Senate has recommended complete termination of a $70 billion effort to replace the iconic Humvee with a fleet of armor-plated, fuel-guzzling trucks labeled "JLTV." The losers here, too, are legion: AM General and General D, Lockheed and BAE, and also Navistar (NYS: NAV) .
Joint Tactical Radio System
Also subject to "disjointing" is Harris' (NYS: HRS) project to develop a joint communications system among the military services. Out of $776 million requested by the Pentagon, the Senate is recommending funding barely a quarter of the requested amount.
Armed Scout Helicopter
Textron's efforts to build a successor to the venerable Huey suffered a twin setback when the Senate cut funding for development of AHS and further removed $17 million in funding to upgrade Textron's Kiowa Warrior helicopter, a 40-year-old platform the committee now deems not "prudent" to invest in maintaining.
Requests for $188 million to buy advanced medium-range air-to-air missiles from Raytheon got slashed by more than a third. The Senate's explanation: There's a production backlog on the missile -- seems not enough bad guys have air forces to shoot at. Consequently , we have unused AMRAAMs stacked to the rooftops and don't need to buy more.
The Air Force had requested $146 million to replace wings on America's favorite tank-buster, but the problem here is similar to that with the AMRAAM: No good targets to shoot at. Plus, with the military in general transitioning to unmanned aerial vehicles for ground-attack, it looks like this particular hog is destined for the bacon factory. The Senate recommended no funding whatsoever for Boeing's (NYS: BA) A-10.
Hard to argue with this one. The committee recommends a 29% haircut to the Air Force's budget for its now-canceled fifth-generation fighter jet, a multibillion-dollar plane that since being built has participated in combat operations exactly ... never.
F-35 Lightning II
In contrast, the Senate's decision to reduce spending on the F-35 by $695 million seems less than logical. With the F-22 seemingly marked for retirement, and the F-117 officially mothballed, the F-35 will soon be the only stealth fighter still in active production. Indeed, according to Admiral Mike Mullen, it may be the last manned fighter jet we ever manufacture! The Senate argues that the Pentagon is buying too many of the planes, too fast, but at this point there really are few alternatives to doing just that.
"Don't fear the Reaper," you say? Soon, bad guys in Pakistan and Afghanistan may not need to. The pilotless plan that's done so much to make the rest of the Air Force superfluous suffered perhaps the cruelest cut of all at legislative hands. All 48 Reapers requested by the Air Force, and seven of the drones requested by the Army, were zeroed out in committee. This saves $813 million in Pentagon spending, granted (at a cost of $813 million to privately held General Atomics). But it also deprives warfighters of a tool that's proved invaluable over the past decade.
In the grand scheme of things, cutting $26 billion from a 2012 base defense budget of $513 billion doesn't sound like much. That's barely a 5% reduction in spending -- but as you can see, the cuts are distributed far from evenly.
The biggest losers, in this Fool's estimation, appear to be General Dynamics and its stable of armored-vehicle programs, and, to an even greater extent, Lockheed Martin -- which suffers attrition both on the ground (GCV and JLTV) and in the air (F-22 and F-35.) If you're wondering where the next shoe will drop, and on whose stock price it will fall, I'd say these two stocks are the first places to look.
Conversely, as I suspect you surmise, I believe several of the Senate's recommendations appear ill advised. If we see shares of General D and/or Lockheed take an inordinate hit on the news, and if cooler heads ultimately prevail, and crucial weapons systems find their funding restored when Congress passes its final defense budget, I suspect that these two stocks have the most potential to rebound as well.
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At the time this article was published Fool contributorRich Smithdoes not own (or short) shares of any company named above. The Motley Fool owns shares of General Dynamics, Northrop Grumman, Lockheed Martin, and Raytheon.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.
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