The Impact of Spending Cuts on Defense Contractors (LMT, BA, NOC, GD, RTN)

Defense contractors issued dire warnings last summer on possible job cuts to their civilian workforces. Defense firms Lockheed Martin Corp. (NYSE: LMT), Boeing Co. (NYSE: BA), Northrop Grumman Corp. (NYSE: NOC), General Dynamics Corp. (NYSE: GD), Raytheon Co. (NYSE: RTN) and London-based BAE Systems and their suppliers employ more than 1 million people and their facilities are scattered all across the country. Many of these firms announced plans that would have resulted in the loss of several hundred thousand jobs if the proposed sequester were implemented. The plans were mostly withdrawn right before the November elections, following the sequestration deal because no one thought it would ever be implemented.

Guess again. If Congress and the President fail to reach an agreement by tomorrow, the cuts go into effect on Friday. Because it is politics, there are several possibilities for getting out of the mess, but that will all take some time.

Cuts just to the U.S. Army budget total $18 billion for the current fiscal year. According to the Army, such cuts would lead to the cancellation of remodeling and modernization plans at many bases, cuts to orders at several thousand suppliers, of which about one-third are already at risk of bankruptcy, and delays to contractor repairs to thousands of vehicles, communications devices and weapons. Total defense spending is set to fall by $45 billion through the end of this fiscal year.

Lockheed Martin, the largest defense contractor, already has forecast record earnings for 2013, even in the face of the impending budget cuts, while both Raytheon and General Dynamics forecast lower-than-expected profits for the year. Lockheed now says it does not plan to cut jobs. Raytheon, the world’s largest missile maker, is sitting on a record backlog of orders.

The defense firms are going to take a hit, but the largest contractors appear unlikely to suffer a lot. Since the beginning of the year, all the defense stocks named earlier, except Boeing, are trading lower by about 2% to 5%. Where the cuts will hurt most are in the smaller firms that often perform as subcontractors. Any job losses at these firms will affect the local economies. The big defense firms look poised to remain above the fray — at least for now.