This might seem like hindsight, which is understandable. And following industry trends isn’t always profitable. But the big danger is timing. Sometimes, momentum can trump underlying fundamentals.
Sequestration
The sequester was put in place so Democrats and Republicans would have to agree on fiscal issues. But all it really did was force budget cuts. Now, instead of eliminating needless and outdated programs, we’re stuck with budget cuts that will affect the military, education system, medical research, and more.
Defense Secretary Chuck Hagel seems to be very concerned. In his opinion, adding $500 billion in cuts to the $487 billion in cuts that are already in progress will not be in our country’s best interest. His dilemma is that he must either go with a smaller force and higher-end technology, or a larger force and lower-end technology. This is the epitome of a catch-22, and it’s perhaps one of the most important catch-22s that has ever existed.
The big player
Lockheed Martin Corporation (NYSE:LMT) is the largest defense contractor in the world. It has been a stalwart over the past decade. Revenue has improved over the past three years and the company is very profitable.
Luckily (or deservingly) for Lockheed Martin Corporation (NYSE:LMT), the Pentagon is likely to maintain strong ties despite impending cuts. However, Lockheed Martin will still take a hit, and it’s laying off employees in preparation for the incoming storm.
Lockheed Martin Corporation (NYSE:LMT) is led by a strong and wise upper management. Therefore, this is a company that might look for ways to add revenue streams outside of its normal dealings in order to make up for potential revenue losses due to government budget cuts.
On the other hand, Lockheed Martin Corporation (NYSE:LMT) owns a debt-to-equity ratio of 8.85, which is astronomically high. As long as the growth is there, this isn’t a major concern, but with government budget cuts in play, this could lead to trouble.
Good news for Northrop Grumman
Lockheed Martin Corporation (NYSE:LMT) recently chose Northrop Grumman Corporation (NYSE:NOC) over Raytheon Company (NYSE:RTN) for AESA radar upgrades on F-16 fighter jets in the U.S. and Taiwan. This was a big win for Northrop Grumman Corporation (NYSE:NOC), especially since South Korea opted for Raytheon Company (NYSE:RTN) for the same service earlier this year.
Northrop Grumman Corporation (NYSE:NOC) has seen revenue decline over the past two years, but it has made strategic moves to improve the bottom line. The share count has been reduced, margins have expanded, and the focus has been on the most profitable contracts. The big concern here is a decline in backlog, which is directly related to government budget cuts. Basically its main customer is less likely to commit than in the past.
