Obama win leaves budget uncertainty for US arms makers

Wed Nov 7, 2012 9:44am EST

* Additional budget cuts seen delayed until March

* Election maintained status quo

* Compromise may still involve further defense spending cuts

By Andrea Shalal-Esa

WASHINGTON, Nov 7 (Reuters) - President Barack Obama's re-election removes one of a long list of uncertainties clouding the outlook for U.S. weapons makers and may improve the chances Congress will delay $500 billion in additional defense spending cuts.

But the larger issue of how to cut government deficits remains, analysts said.

"This will be a nail-biter to the very end," defense consultant Jim McAleese told Reuters on Wednesday.

Obama pledged in his victory speech to reach across the aisle and work with Republicans on reducing the deficit, fueling hopes among industry executives and defense experts that the indiscriminate cuts due to take effect on Jan. 2 would be put off for several months.

The election results -- which keep Obama in the White House, Democrats in control of the Senate and Republicans in charge in the House of Representatives -- mean little change for defense companies, which are already girding for leaner times, given the planned U.S. military drawdown in Afghanistan and mounting pressure to cut government deficits.

But analysts said Republican election losses and Obama's pledge of cooperation should increase the odds that implementation of mandatory, across-the-board cuts will be delayed until the end of March when the current temporary 2013 budget measure and Bush-era tax cuts are due to expire.

That will give lawmakers a bit more time to come up with other ways to reduce the federal deficit, but the final compromise may still result in some additional cuts in the defense budget, analysts and industry executives agree.

McAleese said the ultimate compromise would likely trim the Obama administration's budget request for fiscal 2013 by $20 billion to $26 billion, or nearly half of the proposed annual cut of $55 billion under the pending sequestration.

"The election removes some uncertainty, though we think many investors had already anticipated that President Obama would be re-elected," said Rob Stallard with RBC Capital Markets.

"The focus now shifts to the fiscal cliff, and the associated sequester," he said, adding that reaching a deal "could still be a fraught process, given the lack of co-operation and willingness to compromise between the two parties over the last two years."

Stallard said defense stocks had largely rallied with the market this year but could see greater pressure "if the fiscal cliff deadline starts to loom and no progress is being made."

Analysts had predicted gains for defense industry shares if Republican Mitt Romney had won the White House, given his promises to increase military spending.

Barclays analyst Carter Copeland said an Obama victory was "less bullish" for short-term stock prices, but the election results were unlikely to have a significant impact on the long-term outlook for U.S. defense budgets.

Frank Kendall, the Pentagon's top arms buyer, on Monday said he expected U.S. lawmakers to agree in coming weeks to delay implementation of the automatic defense spending cuts. He said no one in Congress wanted the cuts to kick in on Jan. 2 and Obama was determined to avert the reductions.

Lockheed Martin Corp and other U.S. defense contractors have been warning for over a year that uncertainty about future budget levels is depressing investment in facilities, hiring and mergers and acquisitions.

Lockheed, Northrop Grumman Corp, Boeing Co and Raytheon Co told investors last month that they were focused on cutting costs and drumming up foreign sales to maintain profits, amid a long cycle of budget challenges after more than a decade of growth.

But Kendall said the Pentagon is listening to industry's concerns. He is due to unveil additional measures next week aimed at reducing cost overruns on weapons programs, including a bigger focus on promoting exports of U.S. technology, a move likely to be welcomed by industry.

The Pentagon this week announced $7.6 billion in potential sales of Lockheed missile defense systems to the United Arab Emirates and Qatar, and analysts see additional sales in this area on the horizon.

Lockheed, Boeing and Raytheon are likely to benefit from increased exports of U.S. defense equipment in coming years.

Lockheed's F-35 Joint Strike Fighter and Boeing's F-15 are competing for a huge South Korean fighter order that should be announced early next year.

Shipbuilders General Dynamics Corp and Huntington Ingalls Industries are also eyeing the possible sale of destroyers to Saudi Arabia, while Lockheed is promoting exports of its smaller coastal warship.

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