Congress' New Budget Says "Merry Christmas" to Defense Contractors


Thanks to the new budget, programs like the F-35 can breathe a sigh of relief. Photo: Lockheed Martin via Northrop Grumman.

In a move that's both shocking and welcome, Congress recently passed the Bipartisan Budget Act of 2013. Now, all that's left is for President Obama to sign it -- and he's said he will. There are, of course, winners and losers in the budget agreement, but one of the big winners is defense contractors, as it reduces across-the-board spending cuts. This, consequently, is good news for investors.

Cuts get reduced
One of the biggest problems with automatic, across-the-board spending cuts, a.k.a. sequestration, is the impact it's had on military readiness. "Essential" programs like LockheedMartin's F-35 warred with Boeing's KC-46 tanker for funding, while the Army's much-needed Armored Multi-Purpose Vehicle, currently being bid on by both General Dynamics and BAE Systems , faced the chopping block a number of times.

Moreover, while that's undoubtedly bad for the military, it's also bad for defense companies and their bottom lines. Each program represents profits -- or a loss of profits if sequestration kills it. Consequently, a reduction in defense spending cuts is good news for defense contractors.

$63 billion in relief
The Bipartisan Budget Act doesn't completely get rid of sequestration, but it does provide $63 billion in sequester relief over two years, split evenly between defense and non-defense programs. Further, the deal reverses billions in budget cuts, and as a result, the military's discretionary budget gets a $2 billion boost next year, which brings the total defense budget for FY2014 to almost $520.5 billion, and almost $521.3 billion in FY2015.

More importantly, as pointed out by CNN, "after years of juggling unpredictable, temporary spending bills, the two-year budget deal allows generals and admirals to do something that is military 101: Plan ahead."

What to watch
Sixty-three billion dollars sounds like a significant amount of money, and indeed, it is. However, sequestration is still in affect, and defense spending isn't going back to previous levels anytime soon. Still, anything that reduces automatic cuts is a move that defense companies, and their investors, can appreciate. More importantly, the recently passed budget gives military officials a guide as to what they have to spend over the next few years. Further, it gives the military extra breathing room for "essential" programs, that might otherwise have faced cuts. That's great news for military readiness, and defense companies' bottom lines. Consequently, while not everyone's happy with the recently passed budget, it's good news for defense.

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Fool contributor Katie Spence has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics and Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. 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 a disclosure policy.

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