The US House-Senate budget reduction committee, or the ‘super committee’, that is charged with recommending $1.5 trillion in budget cuts over the next 10 years has just another 10 days to deliver its recommendations before automatic cuts of $1.2 trillion kick in. If the committee fails to agree on cuts, the automatic cuts fall equally among defense spending and a variety of programs that are together lumped under the heading discretionary spending.The discretionary spending cuts would likely come from federal programs that aid the poor, education, and the elderly.
No specific cuts have been identified in the legislation that created the super committee, but to achieve $600 billion in cuts over ten years is sure to cause some pain to a variety of constituencies. That amount is increased by the $350 billion in cuts already approved by Congress over the next ten years. Trying to discern where a publicly traded company might get hurt by impending cuts is, at this point, pretty much guesswork.
On the defense end, cuts are far more likely to have an effect on publicly traded companies that have significant federal defense contracts for everything from fighter planes to software. The following chart shows the top ten defense contractors in 2011, together with the total amount of their contracts, as derived from 2010 contract levels:
|Lockheed Martin Corp. (NYSE: LMT)||$10.9 billion|
|Northrup Grumman Corp. (NYSE: NOC)||$8.2 billion|
|Boeing Co. (NYSE: BA)||$5.1 billion|
|General Dynamics Corp. (NYSE: GD)||$4.6 billion|
|Raytheon Co. (NYSE: RTN)||$4.1 billion|
|KBR, Inc. (NYSE: KBR)||$3.5 billion|
|L-3 Communications Corp. (NYSE: LLL)||$3.3 billion|
|Science Applications Intl. Corp. (NYSE: SAI)||$3.3 billion|
|Hewlett-Packard Co. (NYSE: HPQ)||$2.3 billion|
|Booz Allen Hamilton (NYSE: BAH)||$2.3 billion|
Privately held DynCorp International Inc. falls just above H-P, at $2.4 billion. Excluding DynCorp, the top ten contractors are slated to post sales of $47.6 billion in federal contracts in 2011. The top ten in 2010 posted sales of $68.2 billion. So far in 2011, a total of more than $196 billion in defense contracts have been awarded. The total in 2010 reached $247 billion, and that number is almost surely out of reach for this year.
Cuts to defense spending have already begun, as the US winds down its presence in Iraq and prepares to do the same in Afghanistan. Not including the wars in Iraq and Afghanistan, the Pentagon budget for 2011 reached nearly $550 billion.