What do the following companies have in common?
- The Boeing Company (NYSE:BA)
- Lockheed Martin Corporation (NYSE:LMT)
- Raytheon Company (NYSE:RTN)
- United Technologies Corporation (NYSE:UTX)
- URS Corporation (NYSE:URS)
Except for URS, these are large-cap corporations. They all pay dividends. They are all committed to growth. They are all major government contractors. And, as the title of this piece would imply, they are all companies that have some association with Area 51.
Yes, "Area 51," the location that has achieved legendary status among conspiracy theorists as the site of government "black ops," extraterrestrial cover-ups, and various and sundry other top-secret military activities. Although not officially acknowledged, Area 51 exists (along with several other classified project Areas), located in the sprawling Nellis Air Force Range in southern Nevada (an area that includes the Nevada Testing Range), approximately 80 miles northwest of Las Vegas. The area as a whole is almost the size of Connecticut, mostly desert and largely inaccessible. Area 51, specifically, is located along Groom Lake, west of Tikaboo Peak (from which one can catch a glimpse of the top-secret-project area). A thorough description of the area can be found at the beginning of Wikipedia's entry on Area 51.
[Area 51 map courtesy of Wikipedia.]
What is it about Area 51 that distinguishes these companies? Simply put: their involvement with Area 51 may be an important factor in assuring their stability in the near future.
[NOTE: For information about Area 51 I have relied upon Annie Jacobsen's well-researched book: Area 51: An Uncensored History of America's Top Secret Military Base (Back Bay Books, 2011). Her book is based on the study of several thousand pages of recently declassified documents (and, according to Ms. Jacobsen, there are still millions of pages of classified documents concerning the same area), and hundreds of hours of interviews with some of the principals who were involved in Area 51 activities. Where relevant I cite Ms. Jacobsen's book in the text of this article. Ms. Jacobsen's text is corroborated - and even expanded upon - by material presented through Wikipedia; where possible I link to the relevant Wikipedia entry.]
THE PROJECTS OF AREA 51
Area 51, along with the cluster of other project sites within the Nellis Testing Range, is an area where some of the most ground-breaking military and scientific research has been, and is still being, conducted. In her book, Jacobsen notes that the U-2 spy plane, the A-12 Oxcart spy plane, and the D-21 unmanned drone projects were developed and tested at Area 51, (Jacobsen, pp. 130 - 131, Wikipedia), as was the later F-117 stealth fighter (Wikipedia).
In addition to the development of new aircraft, Area 51 has been used to test foreign (particularly Soviet) "acquired" assets (defectors from Iraq and Syria - on two separate occasions surrendered their MIG-21 and MIG-17 fighters, which were ultimately passed on to the United States for study). These assets were used to test American fighter capabilities against the Soviet-made craft, and also to gain a greater understanding of the state of Soviet technology (Wikipedia).
Various radar systems have apparently been used at Area 51 - both systems designed to operate similarly to Soviet systems and systems designed to study the tracking of stealth aircraft. Other forms of detection equipment have been tested in the area, particularly as pertains to locating radioactive materials.
There have been persistent claims of weapons tests, reverse-engineering of "alien" craft, (Jacobsen, 367 - 372, Wikipedia) and experiments involving the test of new fuel systems such as may have been used in the Aurora and NERVA experiments, utilizing liquid methane and nuclear power, respectively, as a propellant (Wikipedia). Many of these claims have found their way into the popular conspiracy and black-ops theories that abound about Area 51.
[NOTE: Jacobsen's account differs from Wikipedia's with regard to the "alien" craft: according to her interviews with an engineer familiar with the project, the craft (that crashed at Roswell, NM) was, in fact, a Russian experimental spy plane that was to be examined and reverse-engineered at Area 51 (and the "aliens" supposedly captured were Russian crewmen, all of whom but two were dead, the two being permanently comatose). The engineering tasks fell to a company that has been deeply involved in Area 51 activities, Edgerton, Germeshausen and Grier - later shortened to EG&G. EG&G would ultimately end up being purchased by URS Corporation (Jacobsen, pp. 365-372).]
Certain commonalities stretch through the stories of Area 51, including the identity of the companies that operated there. The U-2, A-12 and F-117 jets were Lockheed products. The D-21 involved collaboration between Lockheed and Boeing.
The X-15 rocket, designed by North American Aviation, had a brief encounter with Area 51 from 1959 through 1960. North American, however, has a long history of aircraft development, and has apparently been a fixture at Area 51. North American would later be purchased by Boeing to be part of Boeing's defense services.
Pratt & Whitney (which would ultimately be acquired by United Technologies, and which would itself acquire the Rocketdyne company - an off-shoot of North American Aviation that specialized in the development of rocket engines) developed some of their most powerful jet engines at Area 51, two of their engines being used in the U-2 and A-12 programs, ultimately propelling the A-12 jet to Mach 3 speeds (Jacobsen, p. 200, Wikipedia). The U-2 would incorporate imaging systems designed by Raytheon, another company frequently associated with Area 51 (Wikipedia).
Radar-defeating aircraft systems were developed at Area 51 as part of the program to make the U-2 and A-12 "invisible" to radar (Jacobsen, pp. 128 - 131). Engineering U.S. equipment, as well as reverse-engineering "acquired" assets from other countries was part of the Area 51 mission (Jacobsen, p. 370). Satellite imaging systems would be tested in Area 51. Radar systems and imaging systems are specialties of Raytheon, a company that continues to maintain a presence at Area 51 to this day.
As for the present, satellite images - somewhat ironically - and other photographic evidence indicates that Area 51 has been increased in size, with the addition of new runways and new buildings. Raytheon and EG&G began a project in the area, the project called JT3 - Joint Test Tactics and Training (EG&G now being URS), the precise nature of which has not been discussed, although the program does offer an informative website (Jacobsen, p. 384, Wikipedia). Also mentioned is a highly guarded, classified program known only as S-4, a project so hidden that its existence has been kept from Presidents (Jacobsen, p. 374, Wikipedia).
Not only the Air Force benefited from the work done at Area 51, but so did NASA, the Department of Energy and the CIA.
So . . .
How does a connection with Area 51 benefit the five companies I mentioned at the outset? To understand this, we need to examine what seem to be the budget priorities of the current administration.
THE "FISCAL CLIFF" AND REALITY
Whether it actually comes about or not, current concerns about the possibility of the U.S. economy reaching a "fiscal cliff" involve certain realities: taxes for at least some Americans are going to increase, and federal spending is going to decrease. It is a distinct possibility that the changes could be dramatic. With regard to federal spending - particularly as it pertains to defense spending - there is the issue of whether spending cuts will result in cancellation of federal contracts and what effects those cuts would have on the contractors holding those contracts. Such fears only serve to undermine any growing investor confidence in at least certain sectors of the economy - something no one wants to see at a time when there seems to be a glimmer of optimism in the market.
The proposed Department of Defense budget for FY2013 requests $620.2 billion, of which $525.4 billion is targeted for discretionary spending, the remainder being directed towards mandatory peace-time activities and ongoing overseas operations (primarily in Afghanistan). In addition to DoD discretionary funds, funding for other agencies may be used for discretionary, defense-related activities, with $19.4 billion being used for atomic-energy-related projects (primarily through the Department of Energy), and $7.7 billion for defense-related activities (Department of Justice and Department of Homeland Security, in particular). This amounts to $552.6 billion in today's dollars that will be available for defense spending on projects, with the total funding for defense-related activities (including Veterans Affairs, etc.) amounting to $852.2 billion. Adjusting for inflation, this constitutes a decrease in defense spending, bringing DoD spending to levels comparable to 2008.
[NOTE: These figures are based on information provided by the Center for Strategic and Budgetary Assessments (CSBA) in their Analysis of the FY 2013 Defense Budget and Sequestration, authored by Todd Harrison, dated August, 2012.]
This chart illustrates the portion of the DoD and related budgets that could be affected by cuts as compared to those parts that are not subject to reduction.
The Budget Control Act of 2011 establishes caps for discretionary spending; if the caps are exceeded, the President is empowered to utilize sequestration to reduce excessive discretionary funding requests. While sequestration may not be used to control spending as it affects personnel (i.e., no military layoffs or cuts in pay/benefits), withholding portions of budget requests could influence the funding of discretionary projects. The portion of budget requests to be withheld is determined formulaically, and the percentage of cuts to be sequestered is applied across the budget, rather than item-by-item; it would be up to the DoD (and any other affected agency) to determine how to actually apply the cuts.
Another factor must also be taken into consideration: the reductions intended to be implemented in the 2013 budget are not the only reductions the current administration intends to enact. In a release concerning the 2012 budget, the Office of Management and Budget states that ultimately $78 billion in savings are intended through 2016. That means that program cuts and reductions are going to be a persistent concern for the next four years. The question to be answered, then, is: which programs/projects are most likely to be able to avoid extreme cuts in spending?
Sustaining U.S. Global Leadership: Priorities for 21st Century Defense, a strategic guidance for the DoD issued in January, 2012, presented a set of ten primary mission elements, these elements forming a context within which DoD operations would be defined (pp. 4 - 7). Substantial emphasis is then given to how many of those elements were to be accomplished: through the development of air and sea power, the continued development of weaponry technology, the need to improve defenses against terrorism and weapons of mass destruction - both nuclear and biological - and the need to develop new technologies to assist in all areas of national defense.
The emphasis for the DoD, then, will be on technological development at many levels. According to the CSBA analysis, projects involved in procurement and research, development, test and evaluation (RDT&E) would likely see less in the way of cuts, and the cuts made would be felt later, rather than immediately. Immediate impact would be on those companies involved in operations and maintenance (O&M) (CSBA, p. 4 and elsewhere). It is therefore reasonable to assume that those contractors that are involved in RDT&E - that is, companies more involved in technological development - are companies that will realize less impact on budget cuts, at least initially, and that the impact on RDT&E companies will be less than the impact on companies focused on O&M.
In addition to concerns companies may have with regard to their government contracts, history has shown (as we will see shortly) that companies that become too narrowly focused on government services are ill-adapted to an environment in which those services may be reduced, or even eliminated. As government resources become limited, businesses will need to be able to secure income from non-governmental - that is, public - sources. To succeed as businesses, government contractors need not only be at the cutting edge of technology, but they need also to be able to provide goods and services beyond those used by the government; more importantly, they have to have a pre-existing presence in the public arena, for, as we shall see, waiting to venture into the public domain until their government connections are reduced or severed altogether is not a formula for success.
AND SO . . . THE COMPANIES OF AREA 51
So much for the reality of the situation. Government spending is going to be cut, the cuts may be substantial, and they will take place over an extended period of time. Companies hoping to survive their involvement with the government will have to have two major characteristics: (1) they will need to be deeply involved in technological or procurement areas of contract services; (2) they will need to be able to fall back on non-government-related activities to compensate for the inevitable loss of some portion of their government revenues.
To return to the question asked earlier, how does involvement in Area 51 benefit these five companies?
In short, not only did working in Area 51 involve working at the cutting-edge of technological development, but often defined the cutting edge; in many ways, these companies conceived of ways to extend beyond it. The companies working there constitute the very essence of the type of work the current administration intends to be continued - an endeavor to "technologize" our military forces in an effort to minimize the risk to the lives of our military personnel, and defend our country from the various elements that might seek to bring it harm. The five companies we are looking at in this article not only have been involved with Area 51, but some, if not all, continue to be involved there. Companies working in Area 51 have proven themselves to be able to maintain the level of secrecy demanded of highly classified experimental projects. Moreover, involvement with Area 51 implies funding that is spread out over several agencies, reducing the impact of budget cuts in any or all of those agencies.
(Note: clicking on the "thumbnail" description of a company will take you to that company's website.)
The Boeing Company is one of the world's largest (if not the largest) providers of commercial and military aircraft, missiles, satellites, and associated systems. Its products and services are provided globally, reaching at least 150 nations. Operations are conducted through two business units: Boeing Commercial Airplanes and Boeing Defense, Space & Security; the two units are supported by three additional units: Boeing Capital Corporation (which assists in securing financing for the purchase and delivery of both commercial and military aircraft), Engineering, Operations & Technology (charged with maintaining Boeing's preeminence in research and technology at competitive prices and with environmental responsibility), and the Shared Services Group (which provides the infrastructural services needed to ensure a stable workforce of 170,000 employees).
Boeing Commercial Airplanes has a well-established presence globally. In the past quarter (Q3, 2012) Boeing produced 149 commercial aircraft, to make for a total of 439 commercial jets manufactured so far in 2012. The company maintains around-the-clock technical support globally, and operates maintenance facilities for the aircraft and training services for the crews. Boeing's commercial capacity provides the security of revenues needed in an era of federal austerity.
Boeing Defense, Space & Security [BDS] is the current manifestation of the operations Boeing has maintained with the government since World War I, and it is here that Boeing's connections to Area 51 are to be found. BDS is comprised of defense-related units from several companies acquired by Boeing, and North American Aviation with its long history in projects that found their way into Area 51, and the collaboration that has existed between North American and the other companies of Area 51, provide BDS - and Boeing in general - with the familiarity it will take with the mission of Area 51 to be able to maintain a presence there.
In terms of production, through the first three quarters of 2012 BDS has produced nearly 50 vehicles for military and space programs. While this is only a fraction of the production of Boeing's commercial component, BDS's products involve a higher level of sophisticated technology, making them more labor intensive - not to mention much more expensive - than the commercial products.
[NOTE: North American Aviation is one of the examples, mentioned earlier, of companies that failed to diversify before budget cuts hit them hard. At one point, at the end of World War II, NAA had a contract to build 8,000 planes that was reduced to only 24. NAA was fairly successful in maintaining government contracts, however, and expanded into the areas of nuclear power and the space program - it formed the Rocketdyne company to design and build rocket engines. The contract dwindled, however, and accidents in NASA's Apollo program diminished the demand for NAA's services. NAA eventually ended up being purchased by Boeing, and Rocketdyne was sold to United Technologies' Pratt & Whitney (Wikipedia).]
Lockheed Martin Corp. is one of the two companies in this group that has a direct connection to Area 51 in its own right, most notably (at least, in terms of declassified documents) with the A-12 Oxcart spy plane, which was developed by "Skunk Works," a group of Lockheed scientists and engineers who were charged with developing a jet that would be virtually invisible to radar (Jacobsen, 130 - 135, Wikipedia). In general, Lockheed Martin has consistently been among the top - when not the top - government contractors, playing a significant role in military development, space exploration, oceanographic exploration, development of energy resources and research into new technologies.
In addition to its own connections with Area 51, in 1993 (two years before its merger with Lockheed), the Martin Marietta Corp. secured the contract to manage the Sandia National Laboratories. The laboratories are operated as a "GOCO" (Government Owned/Contractor Operated) arrangement, the laboratories being managed by Sandia Corporation, which became a wholly owned subsidiary of Martin Marietta, and is now owned by Lockheed Martin. Sandia National Laboratories has been involved in Area 51 activities since 1959 (Jacobsen, 114) during the U-2 test flights, and is tied to the Department of Energy's National Nuclear Security Administration.
Beyond its work for the U.S. armed forces, Lockheed has developed a global presence through its research, information technology and security programs through its wholly owned subsidiary, Lockheed Martin Global, Inc. As mentioned above, Lockheed is in collaboration with Boeing in the United Launch Alliance and the United Space Alliance . Its Sandia laboratories has provided a platform for furthering technology with other companies such as Intel (NASDAQ:INTC), General Motors (NYSE:GM) and Cray, Inc. (NASDAQ:CRAY). Major divisions in Australia and the United Kingdom provide those nations with the same technological services that Lockheed Martin provides for the United States.
Raytheon Company has been a part of military research and development almost since its inception in 1922, and was involved in the Manhattan Project from that project's earliest beginnings. Since then, Raytheon has become the "fifth-biggest defense contractor in the world. It is the world's largest producer of guided missiles and the leader in developing radar technology" (Jacobsen, 383). Raytheon is one of the longest-termed residents of Area 51, its technological expertise being central to the projects that have been developed there - and it continues to pursue research and development in the top-secret facility. Its efforts have been focused on implementing technology in virtually every aspect of military systems and "battlespace awareness" - the capacity to monitor activity over a broad area, making combat maneuvers more efficient and effective.
While its most important developments have come from its work in military and government programs, Raytheon has a history of developing products that find their way into commercial markets; they developed the gas-tube technology that made radio a fixture in American homes; from the chance melting of a candy bar in the vicinity of a magnetron tube, microwave ovens found their beginnings. Its radar systems and integrated communications systems in air traffic control and other government, public and commercial applications. Raytheon currently has divisions working globally, with centers in Australia, Canada, France, Germany, Spain, the United Kingdom, the Middle East and India.
United Technologies Corp. , as a conglomerate, owns some of the most prominent names in industry: Pratt & Whitney, Otis Elevators, Carrier, and Sikorsky, along with its divisions in Aerospace Systems (comprised of Hamilton Sundstrand and Goodrich), and Fire and Security systems. Its primary business activities involve building systems and aerospace technology. UTC's commercial businesses (which are focused on building systems, automation and controls) include Otis and UTC Climate, Controls & Security (of which Carrier is a major component); in 2011, these accounted for $31.3 billion in net sales.
UTC's aerospace business consists of Sikorsky, UTC Propulsion & Aerospace Systems (which includes Pratt & Whitney, and Pratt & Whitney's Rocketdyne), with UTC Aerospace Systems (which includes Hamilton Sundstrand and Goodrich). In 2011, Pratt & Whitney, Sikorsky and Hamilton Sundstrand netted over $27 billion in sales; the reformed Propulsion & Aerospace Systems are expected to increase revenues. Pratt & Whitney and Rocketdyne are the companies that tie UTC to Area 51, Rocketdyne through its origins with North American Aviation, and Pratt & Whitney as a developer of some of the most powerful jet engines in use in the late 1950's onwards.
URS Corporation specializes in engineering, construction and technical services in a broad range of enterprises, with a core growth strategy of building a multidisciplinary professional services company. Ranked by the professional publication Engineering News-Record as one of the Top 3 Firms in engineering, URS has developed primarily in the public arena, being involved in the design and construction of bridges, highways, airports, manufacturing, mass transit, and power facilities. It has a "full-flow" involvement in the petroleum and nuclear power areas, being involved in the earliest stages of development, maintaining facilities, and decommissioning. Its operations are global, acquiring the Scott Wilson Group in Britain, and maintaining operations of the Sellafield nuclear complex, storing and treating nuclear wastes in the United Kingdom.
URS' presence as a federal contractor was enhanced by its acquisition of EG&G, a long-time contractor for the Department of Defense. EG&G was initially engaged to use their high-speed photography during tests in the Manhattan Project. Their involvement there evolved into a role in the development of nuclear weapons in the Nellis Testing Range - they also teamed up with Raytheon when both companies worked at Area 51. EG&G evolved into the quintessential defense contractor, providing management and technical services, pilot training, and developing imaging and sensors to be used to detect nuclear, chemical and biological agents. Although URS would eliminate the "EG&G" name from their defense services in 2009, EG&G - for all intents and purposes - continues to operate out of Area 51.
[NOTE: EG&G is another example of a company that learned too late that specializing in defense contracts was a hazardous business plan. Although the company had existed since 1947 it wasn't until the 1970's and 1980's that EG&G attempted to establish a non-governmental presence, but its efforts ended up being sold to established businesses, until finally, in 1999, the non-government operations of EG&G purchased PerkinElmer, adopting the PerkinElmer name, The government side of the business was ultimately purchased by URS in 2002 (Wikipedia).]
Currently, both Raytheon and EG&G (the latter now formally known as URS Federal Services) continue to collaborate in Area 51 on a project known as JT3 - Joint Test, Tactics, and Training, LLC (Jacobsen, 384; Wikipedia)
If there is a characteristic that is common to the five companies outlined above, it is the conception each one has of itself as being something beyond a government contractor (just as the failure of North American Aviation and EG&G to see the importance of such a conception until it was too late led to their ultimate absorption by better-suited companies).
Of the five, Raytheon and Lockheed have corporate identities closely linked with their government affiliations, and of the five companies, these are the two that might suffer most in the face of dramatic budget reductions; however, their ability to expand to a global presence, providing their expertise to many nations, as well as their ability to translate some of their expertise into the public arena provides them with enough diversification to see them through U.S.-related cutbacks.
Boeing, and United Technologies are each sufficiently broadly diversified that federal cutbacks of any magnitude less than drastic would seem to barely constitute a hardship. Each company has a thriving public existence on an international scale.
It is perhaps URS that is in the most enviable position: its expertise and reputation are by and large products of its development as a public corporation. Its principal government connections may well have been inherited from EG&G, "the most powerful defense contractor in the nation that no one had ever heard of" (Jacobsen, 368). Thus, while URS may have deep connections within the government, its non-governmental operations are more than adequate to support it.
I cannot attest to the veracity of any claim made by Ms. Jacobsen in her book, although material available on Wikipedia does confirm most of the claims made about Area 51 and the work being done there. Any assertions concerning the activities having taken place at Area 51 are Ms. Jacobsen's, and not my own.
Documents concerning the U-2 and A-12 programs are unclassified; there is much activity, however, that remains classified - other than the TJ3 project (and there, only the name is known), any activities involving the five companies mentioned above would not be available for discussion.
Data presented in the thumbnails is from the Motley Fool; thumbnail charts are courtesy YCharts. Other information is courtesy the websites of the companies, and historical notes (as well as the map at the beginning of the article) are from Wikipedia.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.