With the budget cuts that began March 1, I would think stocks that are most dependent upon government contracts would be affected the most. Should investors be concerned? Some of the more well-known "weapons makers" said that the US budget cuts will not hurt their profits. I know General Dynamics Corp. (GD) said it would not change its full-year outlook and Lockheed Martin Corp. (LMT) pretty much said the same thing as both companies beat analyst first-quarter expectations.
Richard Whittington, a Drexel Hamilton LLC analyst, had this to say:
The Sequester has proved a non-event. Profit margins are coming in above guidance and historical rates.
All of this after industry officials cried foul, claiming the Sequester was going to have devastating effects upon the industry as a whole. In fact, Lockheed Martin blew away analysts beating EPS by 15% as it came in at $2.33 while analysts expected $2.04. Revenue also soundly beat estimates coming in at $11.1 billion versus $10.3 billion. But revenue did decline about 1.8% from the previous year. Keeping in line with the success of the weapons makers, Northrop (NOC) saw its profits the first quarter come in at $2.03 per share versus the estimate average of $1.73. Weapons makers are not hurting.
F-35's from Lockheed-Martin
One bright spot for LMT is the probability that in June it will receive an order from the US armed forces for as many as 60 F-35 jets! The order could rise to as many as 71 and the contract has a value of about $9 billion. It just so happens that some of the money budgeted for this "next group of fighters" was already promised and spared from the fund reductions as the Pentagon continues to try to protect the "F-35 money" from the Sequester. There has been some recent friction between Lockheed Martin and the Pentagon over budget and costs. The Pentagon wants Lockheed to absorb more of the over costs than it has in the past. This has led to drawn out negotiations due to the need to understand the cost on both sides. But the slow and steady pace is worth it because Lockheed Martin does a great job on the F-35s delivering a sound aircraft in a timely manner.
I know I have painted a bright picture for the weapons companies, but I must also point out that all three weapon makers that I have talked about in this article reported decline in sales to first-quarter. General Dynamics even had less revenue than it did a year ago because orders have been weak and backlogs were down. If the automatic cuts that have been in place remain, sales for all three companies will be put under pressure and it is highly probable that this will cause margin pressures in the latter half of 2013 and possibly even in the 2014. I would also like to point out that the Sequester's full impact may not be known for a number of quarters. These automatic reduction cuts usually take time to hit weapon makers' books. It could have a greater impact than anybody realizes, but we won't know that for a while.
Lockheed Martin is lowering its expectations for sales because of the Sequester, saying that they will fall at the lower end of the forecasts he gave in January. Sales could be reduced by as much as 825 million this year.
The weapons contractor has reached new highs but it also looks like its momentum may be slowing down. Both the RSI indicator and the MACD indicator are showing negative divergences. This means the strength of the move is showing weakness. It does not mean momentum is going to push the stock down because until I see the MACD moving averages dropped below the zero line, we are still very bullish. The stock is also using the middle Bollinger band as support and until I see it drop to the lower band and possibly the 50-day moving average, I am not convinced that the stock is done moving up.