January 10, 2013 09:35 ET

Boeing and Lockheed Prepared for Possible Federal Cuts

The Provides Stock Research on The Boeing Company and Lockheed Martin Corporation

NEW YORK, NY--(Marketwire - Jan 10, 2013) - Aerospace and Defense contractors continue to diligently prepare for the possibility of further Federal spending cuts. They are also facing challenges unique to the market they operate in as well as contending with an uneven global economic recovery. Despite these obstacles, several companies have potential to grow in the next 12 months. The following will look at market specific trends as well as take a broader look at the direction the industry as a whole is moving.

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The future of Federal contracts may have industry-wide ramifications for years for companies in Aerospace and Defense markets. Boeing Company (NYSE: BA) and Lockheed Martin Corp. (NYSE: LMT) were the top two recipients of Federal contracts for the 12 months ending on September 30th, 2011, according to Bloomberg's BGOV200 Rankings. Boeing tallied $22.1 billion in government deals while Lockheed amassed a staggering $42.9 billion in the year long span. Both companies have taken several steps years in the making to mitigate the impact of a substantial decline in Federal contracts.

On the aerospace side, all eyes have been on the recent highly publicized mishaps of Boeing's 787 Dreamliner. The highly touted and much delayed Dreamliner had some problems this week; however these incidents appear to have been blown out of proportion and are not necessarily indicative of long-term problems. Investor confidence may be shaken in the short-term but Boeing looks easily capable of shirking off these technical challenges and move forward with production. In fact, since the incidents, there have been zero order cancellations and when looking back at the inceptions of several older aircraft, there is little to suggest Boeing will not correct these errors and move on from them. The real risk for aerospace manufacturers lies in the future of military aircraft orders. Next generation aircraft appear most vulnerable to cuts because of their high price tags and production delays. Companies like Boeing that are more focused on existing and proven planes like the Superhornet and F-15E Strike Eagle have a much better chance of avoiding the budget cut floor for not only the U.S. military but also of those abroad.

On the defense side, military contractors are employing a variety of strategies to lessen the impact of Federal budget changes. Companies are shifting their operations towards the commercial space but to a lesser degree than their aerospace counterparts. Simply put, commercial demand for mid-range missiles and radar systems is much weaker than the need for new aircraft. This begs the question: how have Defense companies braced for cuts? They have done so in three ways primarily. Lockheed Martin will be used as an example to illustrate such changes. First, many companies have shifted their focus towards products deemed 'essential' by branches of the armed forces and therefore unlikely to be cut. Munitions and cyber security spending are in particularly high demand to the benefit of companies like Lockheed. Second, they are ramping up their international operations and bolstering relations with foreign militaries. Lockheed has agreements in place with countries throughout Europe, Asia and the Middle-East to supply aircraft, which could lessen the effect reduced U.S. orders may have. Third, companies are moving towards commercial markets whenever possible. Lockheed's purchase of several assets from Canada's Aveos Fleet Performance Inc. exemplifies this trend. It gives the company an opportunity to grow commercial revenues as well as establish a greater presence in an attractive market.

Moving forward, the impact of a substantial decline in Federal spending would certainly be felt by aerospace and defense contractors but not to the extent once feared. Investors will want to look closely at individual companies' vulnerabilities to likely cuts, revenue mixes and current backlogs to gain a better sense of what effect budget cuts will have. Growth still appears within reach for 2013.

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