5 Stocks That Could Fall on U.S. Budget Cuts

|
 |  Includes: BA, GD, LMT, RTN
by: Hawkinvest

Now that the United States Government has agreed to a debt ceiling solution and budget cuts, there are a handful of industries that are likely to be most affected by the coming wave of austerity. The defense sector is now being targeted for cuts and some fear they could be so drastic that Defense Secretary Leon Panetta recently warned against making across-the-board cuts. It seems that the question is not if there will be defense cuts, but rather how deep they will be. A recent Bloomberg article details Leon Panetta's warnings and adds: "Private budget analysts have called for trimming or canceling some of the military's big-ticket weapons programs. Eliminating the Navy and Marine Corps variants of Lockheed Martin's (NYSE:LMT) F-35 Joint Strike Fighter and delaying the Air Force's new Boeing (NYSE:BA) aerial refueling tanker could save $19 billion through 2015, analysts at the Center for American Progress said. Limiting the Navy's shipbuilding program to a Virginia-class submarine, a destroyer and two Littoral Combat Ships per year could save $20 billion through 2012, a group called the Sustainable Defense Task Force said."

With defense sector budget cuts looming, these stocks are likely to remain under pressure for the foreseeable future. The lack of clarity on budget cuts will make earnings visibility very difficult and probably cause many investors and analysts to take a wait and see approach in these names:

Lockheed Martin Corporation is a major aerospace and defense company. With some key programs like the Joint Strike Fighter being targeted for cuts, it is likely that LMT shares will drift lower until valuations are lower and more clarity arises on what the budget cuts will have on earnings.

Here are some key points for LMT:

  • Current share price: $73.56
  • The 52 week range is $67.68 to $82.43
  • Earnings estimates for 2011: $7.29 per share
  • Earnings estimates for 2012: $8.69 per share
  • PE Ratio: about 10
  • Annual dividend: $3 per share which yields 4%
  • Book value: $9.87 per share

Boeing is a major aerospace and defense company. This company is more diversified than some of the other names here, so it probably isn't as exposed to a major decline. But, with headline risk from budget cuts likely to persist this stock could see more pressure.

Here are some key points for BA:

  • Current share price: $73.56
  • The 52 week range is $59.48 to $80.65
  • Earnings estimates for 2011: $4.11 per share
  • Earnings estimates for 2012: $5.30 per share
  • Annual dividend: $1.68 per share which yields 2.3%
  • Book value: $5.30 per share

Force Protection (NASDAQ:FRPT) is a specialty manufacturer of armored vehicles which include: a mine protected clearance vehicle, blast and ballistic-protected vehicles, a high-speed all-terrain military vehicle amongst others. With operations likely to wind down in Iraq and Afghanistan, the demand for these products is likely to fall, possibly along with the stock.

Here are some key points for FRPT:

  • Current share price: $4.42
  • The 52 week range is $3.86 to $6
  • Earnings estimates for 2011: 36 cents per share
  • Earnings estimates for 2012: 46 cents per share
  • PE Ratio: about 12
  • Annual dividend: None
  • Book value: $4.63 per share

Raytheon (NYSE:RTN) is a major aerospace and defense company. This company is known for their missile systems and unmanned aerial systems. This company is not as diversified as companies like Boeing and this has caused the shares to trade near the 52 week low. With headline risk from budget cuts likely to persist, this stock could remain under pressure.

Here are some key points for RTN:

  • Current share price: $43.29
  • The 52 week range is $42.65 to $53.12
  • Earnings estimates for 2011: $4.88 per share
  • Earnings estimates for 2012: $5.56 per share
  • Annual dividend: $1.72 per share which yields 3.9%
  • Book value: $28.85 per share

General Dynamics (NYSE:GD) is a major defense contractor and makes combat vehicles, weapons systems, munitions, ships, and the world famous Gulfstream jets. This stock has already started to trend lower and does not appear to have found strong support. The 52 week low is about $55, and I would not be surprise if the stock heads to that level again.

Here are some key points for GD:

  • Current share price: $65.90
  • The 52 week range is $55.46 to $78.27
  • Earnings estimates for 2011: $7.19 per share
  • Earnings estimates for 2012: $7.69 per share
  • PE Ratio: about 9
  • Annual dividend: $1.88 per share which yields 2.8%
  • Book value: $38.49 per share

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.