Defense Stocks: Avoid This Industry In 2012
The Dynamic Wealth Report
January 30, 2012
by Robert Morris, Editor
The past decade was very kind to the US aerospace and defense industry.
Government spending on national defense increased dramatically after
9/11 to fight the war on terror. And it increased even more as the
decade wore on to support the wars in Afghanistan and Iraq.
According to the Department of Defense (DOD), base military spending was
$297 million in 2001. But by 2010, base spending had increased to $528
million.
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That's a hefty 77% increase.
And thanks to the spending boom, defense stocks have performed very
well. Take a look at the following list of defense company stocks. It
shows just how they've done since the market bottom of March 2000.
- Lockheed Martin (LMT) is up 365%
- General Dynamics (GD) is up 258%
- Northrop Grumman (NOC) is up 149%
- And, Boeing (BA) has increased by 123%
No doubt about it, if you had added one or more of these names to your
portfolio in March 2000, you're sitting on some big gains right now.
But the defense stock boom could be coming to an end.
Last week, Defense Secretary Leon Panetta announced sweeping cuts in
defense spending for fiscal 2013. He's asking for a stunning $33 billion
less than Congress approved for 2012.
And this is just the beginning.
Earlier this month, Congress missed the Budget Control Act's (BCA)
deadline for imposing deficit reduction measures. The BCA was passed
last August to secure the votes needed to raise the debt-ceiling. By
missing the deadline, Congress has triggered over $1 trillion in
automatic, across the board spending cuts.
The Defense Department's share of the cuts is a whopping $487 billion
over the next decade. In other words, the DOD will have to chop nearly
half a trillion dollars in spending over the next ten years.
Clearly, it's an ominous sign for defense firms.
The DOD's proposed budget incorporates a wide range of spending cuts.
The Navy will have to slow construction of new ships. The Air Force is
looking at eliminating several tactical air squadrons. And both the Army
and Marines are facing severe cuts in manpower.
According to Lockheed Martin CEO, Bob Stevens, "the impact on the
industry would be devastating."
And the impending cuts come at a time when defense firms are already
starting to struggle.
Last week, LMT said fourth quarter earnings plunged 29% due to lower
government spending. The company also issued a lower profit forecast for
2012 than analysts were expecting.
General Dynamics said they suffered a similar fate in the final quarter
of 2011. Their profit fell by more than 17%. And they too guided
earnings estimates for 2012 below analysts' estimates.
The 2012 outlook for defense firms is dim at best. And the bearish
forecast will likely weigh on shares of defense companies over the year
ahead. Now is clearly not the time to add defense stocks to your
portfolio.
Profitably Yours,
Robert Morris
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