If there is one thing a U.S. politician does not want to appear after the horror of 9/11, it is being weak on defense. Yet with the exception of entitlements, the biggest part of the U.S. government budget is spent each year on defending our nation. With the looming budget cuts in the sequestration set for March 1, how will the largest U.S. defense companies dodge what appears to be inevitable changes in government spending?
Despite the rhetoric of the drastic budget cuts, outlays for the U.S. military and its modernization campaign actually grew by 10% in January. The Department of Defense reported that cash outlays came in at $19 billion, with funding for the Navy and the Air Force up 14% while Army expenditures declined by 3%.
According to the analysts at UBS A.G. (NYSE: UBS), defense stocks are not reflecting a sequestration threat. While conventional wisdom seems to reflect the real possibility that most of the more draconian budget cuts will not survive, something has to give. So UBS analysts concentrated their research efforts to find the stocks with the least amount of budget risk.
Based on a lower risk profile and better opportunities for cost reduction, UBS is positive on General Dynamics Corp. (NYSE: GD), Raytheon Co. (NYSE: RTN), Alliant Techsystems Inc. (NYSE: ATK) and, for European exposure, BAE Systems, which trades on the London Stock exchange.
While there is no question that the budget argument stays center stage for quite some time, the U.S. military is not in a position where it can fall behind in an ever-changing and increasingly dangerous world. No politician, regardless of party, wants to be branded with not supporting our troops and military. So while cuts will be made, they will be less about equipment and weapons and more about manpower and theaters of warfare.