Wednesday, May 6, 2009

Defense Budget Winners and Losers-How Defense Companies Boeing (NYSE:BA), Northrop Grumman (NYSE:NOC),OTCBB: OPXS) and others are Impacted

Defense Budget Winners and Losers
How Defense Companies Boeing (NYSE:BA), Northrop Grumman (NYSE:NOC), General Dynamics (NYSE:GD), Optex Systems Holdings, Inc. (OTCBB: OPXS) and others are Impacted

POINT ROBERTS, Wash., DELTA, B.C. - May 6, 2009 –, a leading global investor and industry portal for the defense and security sector, within, presents a sector close-up on defense stocks following recently announced changes in the Defense Budget.

Defense Budget Winners and Losers
Lisa Springer CFA, Equity research analyst and financial writer

The 2010 defense budget presented by Defense Secretary Robert Gates offers growth prospects for defense contractors involved in cyber security, intelligence, surveillance and reconnaissance, but disappointments for big ticket programs such as F-22 fighter jets, combat search and rescue helicopters and missile intercepting lasers. Secretary Gate’s budget suggests major changes to more than 50 weapons programs, some cancellations and increased funding to a select few. At $534 billion, the 2010 budget is 4% higher than last year and nearly double America’s annual defense budget in the year leading up to the September 11, 2001 terrorist attacks. Secretary Gates is also seeking supplemental funding of $130 billion for the wars in Iraq and Afghanistan next year, down from $141.4 billion in supplemental funding for these operations in the current fiscal year.
Significant programs that lost funding included ground-based missile defense, Army ground vehicle modernization and military transport C-17 aircraft programs managed by Boeing (NYSE:BA) and the DDG-1000 Navy destroyer program jointly managed by Northrop Grumman (NYSE:NOC) and General Dynamics (NYSE:GD). In general, Secretary Gate’s budget shifts spending away from big ticket defense programs conceived during the Cold War to smaller programs that have already proven their usefulness in combat such as unmanned drones used to hunt insurgents in Afghanistan, Iraq and Pakistan. Secretary Gate’s request for a $2.0 billion increase in cyber security and reconnaissance spending for 2010 is a positive development for prime contractors Lockheed Martin ( NYSE:LMT), Northrop Grumman and Raytheon (NYSE:RTN), who have already established substantial capabilities in this segment.
Share prices for several of the major defense contractors rose after the new budget was announced because spending cuts were not as deep as many investors had feared. Lockheed Martin will see funding reductions in some areas but overall fared reasonably well under the new budget. For example, although Secretary Gate’s budget caps purchases of Lockheed’s F-22 fighters at the 187 jets already ordered, it increases 2010 funding 65% to $11.2 billion for Lockheed’s next generation F-35 Joint Strike Fighter. The Pentagon plans to acquire 513 F-35 fighter jets, priced at $80 million apiece, over the next five years and at least 2,300 F-35 fighter jets over the 30 year life of the contract. The Department of Defense also announced plans to purchase two expensive new imaging satellites as part of a contract likely to be awarded to Lockheed Martin, and the Navy shared its plans to purchase three Littoral Combat Ships (LCS) manufactured by General Dynamics and Lockheed Martin. These ships, designed to operate in shallow seas and within 100 miles of shore, are priced at approximately $500 million apiece.
A major change in the new defense budget is the gutting of the Army’s $200 billion Future Combat Systems (FCS) program and its eight program ground vehicles. These vehicles include next generation tanks, cannons and infantry carriers. When first announced six years ago, FCS was lauded as the program that would equip a 21st century military force with high-tech combat vehicles able to outgun and out-maneuver any enemy. The hard lesson learned in Iraq and Afghanistan, however, was that these lightweight vehicles were too thinly armored to survive insurgent attacks with road-side bombs. A few pieces of the FCS program will continue to be funded such as ground robots and unmanned aerial drones. This is welcome news for AeroVironment (NASDAQ:AVAV), a small cap defense contractor and leading supplier of military unmanned aerial vehicles.
Budget plans that defer spending on next-generation FCS platforms are also positive news for defense contractors supplying assemblies and spare parts for existing military vehicle platforms. Because of FCS program cuts, Abrams tanks and Bradley and Stryker ground vehicles are likely to remain the workhorses of the U.S. military for at least the next 20 years. Optex Systems Holdings, Inc. (OTCBB: OPXS ) is a small cap company benefitting from this trend. Founded in 1987, Optex supplies sighting systems and replacement optics installed on most types of U.S. military vehicles, including Abrams, Bradley and Stryker fighting vehicles. In addition, the company’s optical sighting systems target the big Howitzer guns used by the U.S. military to shell insurgent positions in the mountains of Afghanistan with lethal effectiveness. Demand for Optex sighting systems is likely to rise as the war in Afghanistan ramps up and the company is working with its military customers to increase its production and capabilities. Besides military sales, Optex also sees opportunities to integrate some of its night vision and optical sight product lines into retail applications.
In fiscal 2009, Optex (OTCBB: OPXS) expects to recognize $27.4 million in revenues from its sizable contract backlog and the company is actively pursuing on other large government contracts. Backlog was $44 million at fiscal year-end and $39 million at the end of the first quarter of fiscal 2009. Optex revenues rose 64.5% year-over-year during first quarter of fiscal 2009 to $7.2 million and net losses fell to $0.03 million from $0.69 million one year earlier.

Lisa Springer Bio/ Disclaimer:

Optex Systems Holdings, Inc. (OTCBB: OPXS) is a featured defense stock and showcase company on Investor Ideas defense investor portals,, and
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