Being a part of the business community of the Greater Washington, DC area, and espeically having served Defense contractors on a retained basis as a consultant and as part of senior management at two publicly owned Defense contractors, I have immediate reactions when something happens that may impact the area's economy. Secretary of Defense Robert Gates just announced a broad reshaping of the Pentagon budget, and I think there are two major conclusions investors should be sensitive to:
1. It's bad for weapons suppliers
2. It is good for IT companies, especially those that focus on security and intelligence.
I'm going to take a closer look as more information is available, but I'm guessing that the folks at CACI International (NYSE: CAI) and similar companies are minimally breathing a sigh of relief and may even be initiating discussions on how to go after new business. Companies in similar positions would be Computer Sciences Corp, (NYSE CSC), and SAIC (NYSE: SAI). [Fair Disclosure: I do not have positions in any of these companies, nor have I ever, but I do know people in their senior management due to my business relationships].
Another company that falls into the speculative arena would be EFJohnson Technologies (NasdaqGM: EFTI). I had a business relationship with them (reporting to their Chairman/CEO) that ended a couple of years ago and was initiated about a year or so before that [my firm advised as to their public and investor and internal communications programs]. The company has had its share of difficulties, and from its last earnings report of just several days ago, it doesn't look to be out of the woods, but they supply handheld radios that are integral to communications between and among troops in the field and others. They and companies like them could prosper with this new budget, which adds billions of dollars for new technology to fight the insurgencies in Iraq and Afghanistan.
The significant news however relates to a change in the culture of the Pentagon that Gates (and his Commander in Chief) want to engineer. They are using the budget process as a way to do that. That could well have major consequences. If you believe what's been said thus far, major cost overruns that have generated massive revenues for Defense contractors in the past may become a thing of the past. Investors may want to start taking a look at companies that benefit by cost overruns and start getting worried.
I'll comment on this some more as I chat with my friends in the government contracting arena and read details as they emerge.
I have no positions in an y of the stocks mentioned and never have.