What Does The Election Spell For This Industry?

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Companies that make weapons and military equipment generally benefit from the fact that Governments don’t sacrifice when it comes to defense spending. Protecting sovereign borders are an important function of democracy and this particular function ensures that companies involved in the making of military technology end up profiting.

So what does the re-election of Barack Obama mean for the industry? Not much, if you believe me. And not much is what most analysts seem to think as well. Romney would have given a nice push to defense stocks because of his plans to increase the defense budget, but President Obama’s re-election means reduced spending, as he tries to reduce the pressure on the fiscal deficit. Shares of Lockheed Martin (NYSE: LMT) and Raytheon (NYSE: RTN) were down between 5.8 percent and 4.5 percent in early trading after Obama’s re-election. Shares of Boeing (NYSE: BA) also took a hit, going down by about 2.5%.

However, some analysts are of the opinion that the defense cuts will not be a problem in the long run. Barclays analyst Carter Copeland is one of these people; he believes that Obama’s re-election may see a “less bullish” outlook for defense stocks, but is unlikely to have any significant long term effect on the US defense budget. Some analysts said Obama's re-election may help Congress delay $500 billion in defense spending cuts, giving lawmakers time to find other ways to reduce the federal deficit. Frank Kendall, the Pentagon’s top arms buyer said he expected U.S. lawmakers to agree in coming weeks to delay implementation of the automatic defense spending cuts.

I believe that now will be a good time to make a move into this sector, thanks to short-term reduction of prices. Some of these companies have been historically quite dividend friendly and all of them seemed to be gearing up for the inevitable reduction in defense spending from Government’s world over by cutting costs.

Lockheed Martin recently reported third quarter earnings and posted earnings per share of $2.21, well above the estimates of $1.85. The company posted better than expected revenues of $11.9 billion (as opposed to the $11.2 billion expected); but revenues were still down year over year by 2.1%. LMT raised its revenue outlook by $500 million to $45.5-46.5 billion. EPS outlook was raised to $8.20 - $8.40, from $7.90 - $8.10. The company is also expecting improved liquidity through a rise of $125 million in forecasted operating profits. The company has also been a dividend king in the recent past, with a rise in dividends by about 23% over the past 5 years. The company has a P/E of about 10, which is still fairly good.

With Boeing, investors generally tend to focus on the commercial division, but the defense department provides nearly 40% of revenues. The company recently announced plans to restructure its defense, space and securities and cut 30% of management jobs from 2010 levels. The company claimed that the structural changes were not a response to across the board budget cuts, or the re-election of President Obama but part of a long-term strategy attempted at remaining competitive in the space. The company said it would further cut facilities, which are already down 10 percent since 2010, including two sites in Seal Beach, California, and other locations in the state. The company has good sales, making a high end product much less vulnerable to the typical cyclical markets. Commodity prices are not that much of an issue either. Raw material cost is not as much of a concern as the engineering costs associated with the high tech components it makes. The company has a 52 week low of about 62.12, and a P/E of about 12.  The company has sound fundamentals and looks like a good investment.

Raytheon Corp recently posted its 3Q earnings at $1.60 earnings per share. Revenue was $6 billion, down 1.2% from $6.1 billion in the year-ago period. Research and development expenses were up 18.3% year over year to $181 million. Total operating expenses were $5.3 billion, down 2.5% year over year. Raytheon lowered its full-year 2012 sales guidance and expects it to be in the range of $24.3 billion to $24.7 billion versus its prior expectation in the range of 24.5 billion to 25 billion. It raised its adjusted earnings and expects it to be in the range of $5.85 to $5.95 versus its previous expectation of $5.70 to $5.85. The company’s revenue and earnings growth would continue to be driven by its strong presence in the areas of Intelligence, Surveillance and Reconnaissance (ISR); air & missile defense systems; border security; air traffic management; training and homeland security; and cyber security.  Shares of the company are currently trading at around $55 and have a P/E ratio of about 9. It seems like it’s a good time to enter into this sector.’

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ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of Lockheed Martin and Raytheon Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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