Does the Sequester Threaten These Defense Stocks? Lockheed Martin Corporation (LMT), United Technologies Corporation (UTX)

Building my Dividend Porfolio - Lockheed Martin (LMT)The sequester is certainly a big deal for defense stocks, as evidenced by former Defense Secretary Leon Panetta calling the sequester a “disaster” for the Defense Department. But for investors, how should this impact the way you view these stocks?

Ultimately, most believe that some kind of deal paring down the sequester will get done at some point. Don’t hold your breath in Washington, but, if this is the case, this will be mostly a short-term distraction for defense stocks.

Taking a long-term view, the future of the F-35, the biggest defense contract in history, is potentially a bigger deal for defense contractors. Led by Lockheed Martin Corporation (NYSE:LMT) , pretty much all of the major contractors have some skin in the game. With several countries delaying or reducing the amount of F-35s they will buy, it increases the cost-per-plane for a program that is already delayed and significantly over budget.

In the video below, analyst Brendan Byrnes discusses how the sequester, the F-35 program, and the growing cyber security threat affects the big defense contractors. Brendan also gives his top stock in the sector.

If you’d like to take a look at three different companies profiting from our increasingly global economy, check out The Motley Fool’s free report, “3 American Companies Set to Dominate the World.” Click here to get your free copy before it’s gone.

Andrew: Hey Fools, Andrew Tonner here. I’m joined today by Brendan Byrnes, our Motley Fool Analyst.

Brendan, one of the big storylines affecting the industrial space, defense stocks especially, is the sequester and the short-term spending cuts. There really have been a lot of people freaked out, but when you look at them in context as an investor in the defense space, what are your thoughts on it?

Brendan: Yeah, it’s getting all the headlines right now, the sequester. We’ve seen this coming — $500 billion over the next 10 years. Ultimately, something will probably get worked out. Both sides are saying this is going to be too painful.

But the bigger story here, overall, is there’s just going to be less money to go around for these big defense contractors. That’s why you’re seeing them priced so cheaply and, of course, when you look at the world’s biggest defense contract of all time, Lockheed Martin Corporation (NYSE:LMT) heading the F35 program, this is a huge, huge program, and it has implications for every single defense contractor.

When you look at the cost of this program, up 70% since 2001, it’s getting a lot of people nervous, not just the United States, but international partners, as well. Australia is planning to buy 100 F35s; it’s probably not going to be that many. Canada announced it could cut 65 of them. Italy, fewer orders; and then Turkey, of course, is delaying the program for two years.

What happens is, when fewer international customers buy these F35s, the cost per unit goes up, so ultimately, I think this will get reduced a little bit for Lockheed Martin, even in the United States, which has, again, implications for all the defense, especially United Technologies Corporation (NYSE:UTX) through its Pratt Whitney subsidiary, which makes the engines.

Another trend to watch in defense is cyber security. We’ve seen Raytheon Company (NYSE:RTN), General Dynamics Corporation (NYSE:GD), and Northrop Grumman Corporation (NYSE:NOC) all make acquisitions related to cyber security in 2012 with China, we know, getting increasingly involved with that. That’s possibly a major growth area, going forward.

The defense industry, looking at these stocks — Lockheed Martin Corporation (NYSE:LMT), Raytheon trading at about 10X earnings, Northrop Grumman trading at about 8X earnings — there’s a reason they’re this cheap. We have a lot of uncertainty baked in here.

I think Lockheed Martin Corporation (NYSE:LMT) could be a solid play if you’re looking for maybe a little bit of defensive stock, a 5.2% dividend, so you could collect that. I wouldn’t expect a ton of growth, going forward, but in this space I like United Technologies Corporation (NYSE:UTX). It’s a stock I own, it’s better diversified. They have a bunch of different units; Otis Elevators, Carrier, that can help them better diversify, also other commercial aviation interests.

I would look for a more diversified play in this space, but again Lockheed Martin could be a solid value play for a dividend-seeking investor.

Andrew: Definitely it’s interesting connecting the dots between these macro storylines we see, and boiling it down to specifics.

Brendan: It’s just a lot of uncertainty, which freaks out investors.

The article Does the Sequester Threaten These Defense Stocks? originally appeared on Fool.com and is written by Brendan Byrnes.

Brendan Byrnes owns shares of United Technologies. The Motley Fool owns shares of General Dynamics, Lockheed Martin, Northrop Grumman, and Raytheon Company.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!