The House Appropriations Committee approved a couple of days ago the fiscal 2014 bill, which provides $512.5 billion in non-war funding and highlights a $5.1 billion decrease compared to fiscal year 2013. Lobby efforts by some defense contractors were not enough, and this new budget could hurt sales and growth in the sector. For the time being, companies are not fully experiencing the impact this could have, but tougher times are still to come for the industry.
How Could Sequestration Affect Companies?
Both the fiscal austerity policy developed in 2013 called sequestration and now the new budget cuts will certainly impact the defense sector, but the question is who will receive the hardest hit. At the moment, there is no certainty about how the Pentagon will administer the cuts in each weapons program, so companies are having a hard time projecting numbers. Companies will have to go back to the trenches strategy.
Lockheed Martin: Expect Some Turbulence
Lockheed Martin Corporation (NYSE:LMT) has already released a statement concerning how sequestration could impact the sector and demanding clarification on the budget cuts, alleging that “sequestration will lead to furlough in some situations and could trigger layoffs.” This is not a happy statement for investors, but let’s take a look at the company’s financials.
The company posted a net sales decrease of 2% totaling $11.1 billion and a net earnings increase of 14% to $761 million for the first quarter of 2013 compared to the same quarter the prior year. Although sales have declined, the company had a good control of expenses and thus boosted its operating profit, resulting in an earnings surge. But the company will face some trouble in the coming months as described in their earnings release: that sequestration could trim 2013 net sales by $825 million, a big number. We expect to see some turbulence in the stock as it is largely exposed to the US: in 2012 82% of the $47.2 billion in net sales was from that region.
Raytheon: Flat Sales But Improved Operating Cash Flow
What about Raytheon Company (NYSE:RTN)? The company develops technology and products for defense and security markets globally. For the first quarter of 2013, Raytheon Company (NYSE:RTN) had almost flat net sales compared to the same quarter of 2012, totaling $5.9 billion. However, it has improved its operating cash flow significantly from $111 million to $422 million in the same period of comparison mainly by working capital improvements, which indicates the company could face some budget blows and still generate profits. Its stock has been untouched by sequestration fears and has gained more than 17% in the last six months. Another important point that indicates the company is financially solid is the quarterly dividend it announced of $0.55 per share, $2.20 annualized.