Anticipating FY10 Defense Budget

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Includes: BA, BAESY, COL, CSC, GD, GEOY, LMT, NAV, NOC, OA, OSK, PPA, RTN, UIS, UTX
by: Scott Sacknoff

Although the industry got a teaser of what’s to come when Defense Secretary Gates announced the top line budget figure as well as some decisions regarding the fate of the largest programs and initiatives, the key event that will guide the sector’s performance over the next several months is the release of the line item details and program specifics found in the FY10 budget -- anticipated to provide specifics not just for the forthcoming year but the next several. These details are now expected, according to White House sources, sometime in May.

Overall, analysts have stated that there were no big downside surprises in the proposal and the shift in priorities had little impact on most firms. As we said last month, we needed to see whether additions in some programs would offset declines in others. Lockheed Martin (NYSE:LMT) for example was seen as one of the big winners and big losers with the F-22 production begin shut down while the F-35 was expanded.

Overall, defense firms gained on Wall Street, besting the market in April by more than 3.5% as investors expressed relief that the proposed cuts did not go further. With valuations still at multi-year lows, there is potential for the gains in the current month to continue. However, unit the full budget is finally released, and there is time to analyze the details and its direction, expectations will have to be tempered and my comments will be limited.

As far as news that you can use:

  • The Department of Homeland Security announced grants of more than $770 million to protect U.S. ports and transit systems and $48.6 million to buffer security zones around chemical and nuclear facilities.
  • A request for $83.4 billion in wartime supplementals was submitted by the White House to cover the cost of the two wars through the second half of 2009. Future wartime spending is expected to be included in the core DoD budget request.
  • Secretary Gates, although cancelling an $87 billion proposed Army ground vehicle program that was part of FCS, stated that there will be “substantial money” for developing updated vehicles “hope that wee can more forward in FY-11”.
  • On April 23rd, the DoD kicked off its 2010 Quadrennial Defense Review to determine what type of capabilities will need to maintain national security in current years.
  • CSAR program would recapitalize the helicopter fleet at $2.8 billion (or half previous allotted for 2010) under a Resource Management Directive (this after the $15 billion CSAR-X program was scrapped).
  • Changes/cancellations in various helicopter programs have analysts thinking that Sikorsky (United Technologies (NYSE:UTX)) CH-53K will benefit with a planned 30% boost in orders.
  • The Air Force has decided to stop trying to save the F-22 in favor of promoting the F-35. Lockheed Martin manufactures both and has called it a net gain.