The effects of the federal government’s sequestration of $85 billion in spending has been a major concern for Lockheed and other defense contractors. Lockheed now estimates the impact of sequestration will reduce net sales in 2013 by $825 million, and the company has adjusted its full-year revenue outlook as a result.

For the 2013 fiscal year, Lockheed now expects sales at the low end of the $44.5 billion to $46 billion range it announced in January. The company did not lower its forecast for full-year EPS from the January range of $8.80 to $9.10. The consensus estimate for the year calls for revenues of $45.12 billion and EPS of $8.92, roughly the mid-point of the company’s announced ranges.

It is worth noting that the consensus EPS estimate for Lockheed rose by $0.10 over the past 90 days. Overall, the sequester has had little impact on earnings to date and the future impact looks to be manageable.

The company’s CEO said:

While the impact of sequestration on our business has been limited to date, we continue to work closely with our customers to better understand the future impact sequestration may have on our programs.

Lockheed’s largest segment, aeronautics, saw a 14% drop in revenues year-over-year due to fewer deliveries of the company’s F-16 and C-130 aircraft. Operating profit was essentially flat to a year ago, and operating margins rose from 10.4% in 2012 to 11.9% in 2013.

The company’s information systems and global solutions segment experienced a profit increase of just 1% year-over-year, while profits and margins were flat. This segment of the company, which includes Lockheed’s cybersecurity work, should probably have done better.

Lockheed’s shares are up 2.2% in premarket trading, at $95.85 in a 52-week range of $80.14 to $97.57. Thomson Reuters had a consensus analyst price target of around $95.30 before today’s report.

Shares of Palo Alto Networks Inc. (NYSE: PANW), Sourcefire Inc. (NASDAQ: FIRE), CheckPoint Systems Inc. (NASDAQ: CHKP), Websense Inc. (NASDAQ: WBSN), Vasco Data Security International Inc. (NASDAQ: VDSI), and Proofpoint Inc. (NASDAQ: PFPT) all opened lower or nearly flat this morning.

At the same time that Fortinet said its lowered expectations are partly due to “a few deal” that failed to close as expected, the Obama administration budget proposal to Congress seeks to boost spending on cybersecurity in the public sector by about $1 billion in fiscal year 2014, to more than $13 billion. In the Defense Department alone, an additional $800 million is proposed for cybersecurity operations.

Ironically, the largest providers of security systems to the Defense Department are traditional defense firms like Lockheed Martin Corp. (NYSE: LMT), Raytheon Co. (NYSE: RTN), and British-based BAE Systems Inc. These firms got a share price boost today, as did SAIC Inc. (NYSE: SAI).

Firms like Fortinet do sell to government agencies, although the sales are often made indirectly through another reseller or government contractor. In its Form 10-K for last year Fortinet said that it has had “limited traction” in sales to the U.S. federal government.

It seems obvious that Fortinet and the other primarily non-defense firms should begin to focus more on government sale since that appears to be where the money will be. Just sayin’.

Fortinet shares have been hit hard today, down more than 14% at $18.75 in a 52-week range of $17.53 to $28.23.

The U.S. should not forget that our precision targeting tools have within their range the Anderson air force base on Guam where the B-52 takes off, the Japanese mainland where nuclear submarines are deployed and the navy bases on Okinawa.

North Korea already had threatened a nuclear attack on the U.S., a threat that no one outside North Korea believes is within its capabilities. But all this tough talk could lead to a bump in U.S. defense positioning and an increase in defense spending, currently facing a spending cut of $45 billion through the end of the 2013 fiscal year in September.

Defense contractors like Lockheed Martin Corp. (NYSE: LMT), Northrop Grumman Corp. (NYSE: NOC), General Dynamics Corp. (NYSE: GD), Raytheon Co. (NYSE: RTN), Boeing Co. (NYSE: BA) and BAE Systems have all seen share prices fall by as much as 8% since the beginning of the year before recovering to current levels of around plus or minus 1%. The share price move likely reflects on an aspect of defense that has come front and center only recently: cyber security.

A cyberattack against several of South Korea’s broadcasters and banks yesterday is being attributed to the North Koreans. When you stop and think about it, North Korean cyberattacks are disruptive, inexpensive, and far less likely to draw a military response from the United States, Japan or South Korea. It is a nearly perfect threat.

The U.S. companies that are developing systems to thwart cyberattacks from North Korea, Iran, or any other country with a bone to pick with the U.S. are the most likely to benefit from the heightened focus on cyber warfare.

Both Raytheon and Lockheed Martin have joined AT&T Inc. (NYSE: T) and CenturyLink Inc. (NYSE: CTL) in the U.S. Department of Homeland Security’s Enhanced Cybersecurity Services program under which the companies may have access to government intelligence that they can use to beef up their cyber security services and then resell the services to their own customers. President Obama issued an executive order in mid-February authorizing the program.

Raytheon and General Dynamics have acquired a host of cyber security companies in the past five years or so and, along with Lockheed Martin, are actively offering cyber security products both to the government and to private businesses. Consulting firms like Booz Allen Hamilton Holding Corp. (NYSE: BAH) and International Business Machines Corp. (NYSE: IBM) are also in the cyber security business, as is Hewlett-Packard Co. (NYSE: HPQ).

One other defense sector that could see a boost is missile defense. After all, if North Korea is threatening to fire missiles at U.S. installations and even the U.S. mainland, then it’s possible that there will be some additional calls within the U.S. for developing a massive — and massively expensive — missile-based defense system. Raytheon is the country’s leading missile maker.

For the traditional defense contractors, cyber security is a far cry from multibillion dollar weapons systems’ contracts, but they will go where the money is. And right now, the money is in cyberspace.

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.

For the full year, Northrop Grumman posted diluted EPS of $7.81 on revenues of $25.22 billion, compared with EPS of $7.52 on revenues of $26.41 billion in 2011. The consensus estimate called for EPS of $7.41 on revenues of $25.07 billion.

On a pension-adjusted basis, the company posted EPS of $1.85 in the fourth-quarter, still well above the consensus estimate.

The company’s CEO said:

As we look ahead, we expect challenges, but we are confident in our team’s ability to address those challenges and continue to create value for all our stakeholders.

The most important part of today’s release is the guidance the company provided. For 2013, Northrop expects revenue to total about $24 billion and EPS to come in at $6.85 to $7.15. While those numbers are close to estimates calling for EPS of $6.99 on revenues of $24.36 billion, the story is all about the federal budget:

The company’s 2013 financial guidance is based on the assumption that the current six-month Continuing Resolution (CR) will be immediately followed by appropriations, which, even if in the form of a full-year CR, will provide for program spending levels consistent with those set forth in the President’s FY 2013 Budget request (PBFY13) and that support and fund the company’s programs.

Thus, even if Congress and the president agree on a budget plan, the plan will cut U.S. defense spending and Northrop’s revenues will drop by at least $1 billion over the year. And that’s the happy face.

Northrop’s shares are up about 1.5% in premarket, trading at $67.75 in a 52-week range of $56.59 to $71.25. Thomson Reuters had a consensus analyst price target of around $66.50 before today’s report.

Japan Airlines was among the first of Boeing’s customers to receive the new 787 Dreamliner. This plane has been plagued with issues from electronics to delamination problems. Other issues have been around the engines and one flight from Chicago to Houston of a 787 Dreamliner owned by United Continental Holdings (NYSE: UAL) was forced to make an emergency landing in recent weeks.

Reports were out yesterday that the The U.S. National Transportation Safety Board had started an investigation into yesterday’s incident. With another incident today, you can only imagine how much investors are getting less comfortable with this plane. Imagine how those passengers are feeling.

Boeing is having yet another hard day with shares down 3.2% at $73.66 now that this new problem arose. Shares were already soft after BB&T downgraded the stock this morning. Today’s loss is on top of a 2% drop yesterday.

One version of the proposed legislation calls for reinstatement of the 1994 ban on sales of certain semiautomatic rifles, handguns and shotguns, as well as magazines that hold more than 10 rounds of ammunition. President Obama has stated that he will support a ban on these weapons, and that is very likely the driving force behind the high sales.

Whether any such legislation has a chance of making it through either the House or the Senate is a different matter, but gun buyers are taking no chances, lining up 20-deep at some stores, according to a report at CNNMoney.

Gunmakers Smith & Wesson Holding Corp. (NASDAQ: SWHC) and Sturm, Ruger & Co. (NYSE: RGR) have seen their share prices drop sharply since the Newtown shooting. Ammo maker Alliant Techsystems Inc.’s (NYSE: ATK) shares have risen slightly. For the year, though Smith & Wesson’s shares are up about 87% and Sturm Ruger’s shares are up more than 30%.

Paul Ausick

While President Obama has said that the Second Amendment will remain intact, and while the words “gun control” and “bans” are craftily being avoided, it is important to remember that Joe Biden was effectively the author of the assault weapons ban that went into effect in the 1990s. After Obama’s speech on Wednesday, the writing on the wall is very clear as he called for a serious proposal no later than the end of January.

As far as gun sales and ammunition sales being elevated or higher, let’s call it a massive understatement. We showed that Wal-Mart Stores Inc. (NYSE: WMT) was out of certain guns online if you type in a ZIP code. The reality is much more extreme, and there is a bit of personal experience here that will show just how much the sales went up — EVERYWHERE is sold out! If you want to purchase a shotgun or a handgun, these are still available. If you are wanting a rifle that would be classified as an assault rifle, an AR, you missed your chance.

Gun buyers in Houston have bought up the entire inventory of AR guns. It is not just the guns. The ammunition is sold out. The magazines are sold out, and not just the magazines that hold 30 or more rounds. Even finding a 10-round magazine is elusive. And ammunition? The smaller boxes of ammunition in the 223-556 calibers may be found, but not the larger boxes. Try calling Top Gun, Academy, Carter Country and other stores and you will get more or less the same answer: “We are sold out entirely, we have no idea when we are getting new stock in, and we have no idea what the pricing will be.” Even the online sites that deal in guns and ammo are now low on inventory as sales have spiked.

To go even further to show how much the demand spiked, the FBI background check system was overloaded. Customers have had to leave guns at the stores because the electronic system kept crashing on Wednesday.

This is not just a local issue either. One email went out from a licensed retailer that most of the suppliers are now cleaned out entirely in their “military style” weapons, ammo, magazines and accessories. The email also said that they have no idea when new shipments will be available.

At issue here is when bans go into effect. Bans drive purchasing, whether it is right or wrong. It seems that a ban of any sort drives people to decide that they better get the banned product before the ban goes into effect. Whether this is smart or rational is something we’ll leave up to the readers to decide. After all, assault weapons and guns of any sort are very heated topics on both sides of the argument and this often transcends party lines.

Wednesday saw interesting trading in the gun makers and retailers. Smith & Wesson Holding Corp. (NASDAQ: SWHC) rose by 7.2% to $8.35 after having seen shares slammed very hard since last Friday’s Newtown massacre. Sturm, Ruger & Co. Inc. (NYSE: RGR) rose 7.5% to $43.63. Dicks Sporting Goods Inc. (NYSE: DKS) has announced some changes to gun sales policies, but its stock was down by 1% at $45.87 on Wednesday. Cabela’s Inc. (NYSE: CAB) is a large seller of hunting, fishing and camping equipment, which includes guns and ammunition, and its shares rose by 5.7% to $41.00 on Wednesday.

Alliant Techsystems Inc. (NYSE: ATK) is classified as a defense and aerospace company, but it is the largest maker of gun and sporting ammunition in America with brands such as Federal Premium, Alliant Powder, RCBS, CCI, Fusion, Speer Ammo, Speer Bullets, Estate Cartridge and Blazer. Its shares were basically flat on Wednesday, or at least down one cent to $62.70 on Wednesday.

The new efforts might not be called “gun control” and the word “ban” may continue to be avoided. Still, the situation and outcome are both very obvious.

JON C. OGG

Smith & Wesson Holding Corporation (NASDAQ: SWHC) and Sturm, Ruger & Co. Inc. (NYSE: RGR)have seen their stocks hit hard since the massacre. Private equity giant Cerberus has even gone as far as saying that it plans to sell off its gun-making units. We would note that this massacre has created a rush to buy guns, ammo, and other products, so it possible that these companies will raise guidance. The problem is that if gun control efforts are successful then it does not matter what the demand is today because they will face more regulation and more restricted sales ahead.

Here is a summary of President Obama’s speech on gun control:

More Americans have died from gun violence since the massacre last Friday… Challenging old assumptions and this needs to lead to action… There is no law that can protect against all violence… Medical care efforts need to be pursued… The fact that the issue is complex cannot be an excuse… Obama asked VP Biden to come up with a set of concrete proposals no later than January… Not a study that is a report in 6 months… Biden wrote the 1994 crime bill that included an assault weapons ban… there is a growing consensus to build from to support banning sales of assault rifles and high-capacity ammo clips and background checks… the ATF is also bein encouraged to participate… the Second Amendment protects the right to bear arms… the vast majority of gun ownership is responsible, but the vast majority is likely to support law-breakers from buying a weapon of war and for people to get military-style weapons so easily… I will use all the power of this office to help prevent tragedies of this sort even if not all can be prevented… This effort requires the help of the American people… need to stand up and say “enough!” on behalf of our kids…

The Q&A from reporters has been focused on the fiscal cliff rather than on the issues around gun control.

Smith & Wesson Holding Corporation (NASDAQ: SWHC) was up 6% at $8.26 and Sturm, Ruger & Co. Inc. (NYSE: RGR) was up 4.5% at $42.41 before the President’s speech today. Sturm, Ruger shares are down from a recent peak of $60 and Smith & Wesson shares are down from a recent peak above $11.00.

Dicks Sporting Goods Inc. (NYSE: DKS) has announced some changes to gun sales policies and Cabela’s Incorporated (NYSE: CAB) is a large seller of hunting, fishing and camping equipment which includes guns and ammunition.

As a reminder, Alliant Techsystems Inc. (NYSE: ATK) is evaluated as a defense and aerospace company but it is the largest maker of gun and sporting ammunition in America with brands such as Federal Premium, Alliant Powder, RCBS, CCI, Fusion, Speer Ammo, Speer Bullets, Estate Cartridge and Blazer.

This article has been posted without comment about the tragedy in Newtown and other massacres that have taken place. Our thoughts are with the families and victims impacted by these tragedies.

UPDATE at 12:55 PM EST ON SHARE PRICE CHANGES:

Smith & Wesson Holding Corporation (NASDAQ: SWHC) is up 8.8% at $8.48; was up 8.4% at $8.45 (12:30)

Sturm, Ruger & Co. Inc. (NYSE: RGR) is up 6.7% at $43.32; was 6.1% at $43.08 (12:30)

Alliant Techsystems Inc. (NYSE: ATK) is up 9-cents at $62.80; was up 1-cent at $62.72 (12:30)

Dicks Sporting Goods Inc. (NYSE: DKS) is down by 8-cents at $46.27; was up 3-cents at $46.38 (12:30)

Cabela’s Incorporated (NYSE: CAB) is up 3.4% at $40.08; was up 3.4% at $40.10 (12:30)

JON C. OGG

Northrop Grumman posted adjusted diluted EPS of $1.73 on revenues of $6.27 billion. In the year-ago period, the company reported EPS of $1.63 on revenues of $6.61 billion. Third-quarter results compare to consensus estimates for EPS of $1.69 and $6.34 billion in revenues.

EPS on a GAAP basis came in at $1.82 for Northrop Grumman.

Northrop Grumman’s CEO said:

Our focus on performance, effective cash deployment, and portfolio alignment continues to create value for our shareholders, customers and employees. We are working closely with our customers to bring innovative, affordable solutions to support their needs in today’s fiscally constrained environment.

Operating margins at General Dynamics fell from 12.7% in the third quarter of 2011 to 11.4% this year. At Northrop Grumman, operating margins fell from 12.5% a year ago to 11.7% this year.

General Dynamics reported a total backlog of $51.5 billion and an estimated potential contract value of an additional $26.1 billion. The consensus estimates for EPS and revenue at General Dynamics call for EPS of $7.09 on revenue of $32.32 billion.

Northrop updated its guidance for the full year. The company now expects sales to be about $25 billion, below the top of the prior estimate of $25.4 billion. Operating margins for the year is now forecast to reach into the “high 11%” range and diluted EPS is forecast at $7.35 to $7.40. The consensus estimate had called for EPS of $7.24 on sales of $25.19 billion.

The looming fiscal cliff is a huge threat to defense firms like these. A cut of $50 billion in defense spending is included in the sequestration bill, and if nothing is done to extend the deadline or revise the spending cuts, hundreds of thousands of jobs are at stake in an industry that employs well over 1 million people.

General Dynamics’ shares are inactive in premarket trading, having closed down 1.4% yesterday at $66.21 in a 52-week range is $60.60 to $74.54. Thomson Reuters had a consensus analyst price target of around $73.70 before today’s report.

Northrop Grumman’s shares are also inactive this morning, having closed at $69.66 last night, down 0.8% in a 52-week range of $52.69 to $71.25. The consensus target price for the shares was around $64.00 before today’s report.

Paul Ausick