Sector Snap: Defense Contractors

Analyst says defense cos. should get a boost from approval of 2012 defense spending plan



NEW YORK (AP) — A Benchmark Co. analyst said Monday that defense contractors should get a boost from the fiscal 2012 defense budget recently approved by Congress.

On Saturday the Senate voted to give final congressional approval to a $1 trillion bill financing the Pentagon and scores of other federal agencies through next September.

Analyst Josephine Millward said the spending includes a defense budget of $633 billion comprised of a $518 billion base budget and $115 billion for overseas contingency operations, otherwise known as war funding.

She said that the base budget is up $5 billion, or 1 percent, from the previous fiscal year's enacted level. War funding is down 27 percent from the year before as U.S. troops withdraw from Iraq.

"Passage of the fiscal year 2012 budget helps improve visibility for defense companies in the coming year, as most companies were concerned about impact on order flows with an extended or full-year continuing resolution," Millward wrote in a note to investors.

She warned that the Pentagon is required to cut defense spending by more than $450 billion over the next decade and is expected to submit a fiscal year 2013 budget request in February that will be down by over $40 billion.

That's expected to be followed by additional cuts of about $50 billion a year for the next ten years, which don't include cuts that will happen automatically because the so-called congressional super committee failed to reach agreement on spending cuts earlier this year, Millward said.

For 2012, she noted that companies like AeroVironment Inc., which makes unmanned aircraft systems, should benefit from a 69 percent increase in funding for those projects, to $93 million.

While the spending includes less money for the medium and heavy tactical vehicles made by Oshkosh Corp., it shouldn't affect that company's bottom line too much. And Harris Corp., which makes communications equipment should be well positioned to compete for military radio contracts, Millward said.

She said iRobot Corp., which makes unmanned ground vehicles, could be hurt by lower-than-expected funding for its projects, although the Army appears committed to using small, unmanned vehicles in the long run.

In midday trading AeroVironment shares fell 62 cents, or 2 percent, to $30.95; Oshkosh fell 7 cents to $21.20; Harris fell 29 cents to $34 and iRobot rose a penny to $29.86.

Quiz: How well do you know India's economy?

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