By Jeremy Herb - 04/03/13 09:00 AM EDT
The biggest defense companies’ share values have soared faster than the stock market since sequester spending cuts began on March 1.
While the S&P is up 3.7 percent and the Dow Jones industrial average has risen 4.3 percent, Boeing has jumped 9.6 percent, Lockheed Martin is up 8.3 percent. Northrop Grumman has climbed 6.1 percent and Raytheon is up 6 percent.
The jump in contractors’ share prices is seen as a relief rally after the protracted uncertainties of the sequester debate, but the longer term impact of the cuts is still controversial.
“There was a great deal of fear about sequestration, and some of that is proving a bit overdone,” said Richard Aboulafia, a defense analyst at the Teal Group. “While it’s a softer budget outlook, it’s still a very big market. It’s not as though we’re experiencing the same kind of drawdown we saw after the Cold War.”
Defense experts say the sequester will inflict pain on the defense sector, but the pace of the cuts will not help contractors make their case. “There are real impacts here on national security from what this is going to do to the defense industrial base, but it’s not this year, it’s not even next year — and will anyone be listening by the time those effects become evident?” said Todd Harrison, a defense budget analyst at the Center for Strategic and Budgetary Assessments.
“Given all the hoopla made before the election ... this does leave one to conclude that they were crying wolf for political reasons,” he added.
Not every defense firm has outpaced the stock indexes. General Dynamics was beating them through the end of March, but is now down 0.8 percent since March 1. The sequester cuts come as the wars in Iraq and Afghanistan are winding down stoking debate about the future size of the military.
Sequestration will cut $41 billion from the Pentagon’s 2013 budget, which runs through September. But major defense firms are still working on contracts from past years’ budgets.
“The recent rise in defense stocks resembles ...a relief rally, meaning price recovery following a period of uncertainty,” said Loren Thompson, a defense analyst at the Lexington Institute who consults with multiple defense firms.
Boeing spokesman Daniel Beck said it was “still too early” to determine what impacts sequestration would have.
“We have yet to receive specific guidance from our military and government customers about any changes to our programs and it is still too early for us to speculate on the impact on our facilities and the employees,” Beck said in an email to The Hill. “I can say that we continue to be concerned about the potential long-range impact to national security and the U.S. aerospace industrial base.”
Tom Captain, a vice chairman of aerospace and defense at Deloitte, said that the defense firms have blunted the impact of the cuts by preparing for smaller Pentagon budgets over several years. Many firms have restructured by shrinking their payrolls, cutting costs and expanding to foreign and commercial markets.
Captain authored a Deloitte study last month that found the top 20 defense and aerospace firms increased revenues in 2012 by 5.5 percent thanks to commercial gains, while defense revenues had declined.
Captain said that defense firms’ quarterly earnings reports, which will be released at the end of April, will be a key point and test investors’ appetite for their stocks.
Dan Stohr, spokesman for the Aerospace Industries Association, an industry trade group, said that many smaller contractors are already feeling the brunt of the cuts, even if the major firms are not.
Stohr said that the impact on smaller local businesses would eventually trickle upward and be felt on a national scale. He warned that layoffs, mergers and further industry consolidation were all on the horizon if the cuts are not dealt with.
“We’ve already done what major mergers we can do, and at some point, if the industry is downsizing further, we’re going to lose capability,” he said. “That’s the major concern at this point.”
When sequestration was looming last year, some defense firms painted the situation in dire terms.
Former Lockheed Martin CEO Robert Stevens warned that he would send out layoff notices to all 120,000 Lockheed employees and could have to lay off as much as 10 percent of Lockheed’s workforce.
The layoff notices became a major political issue in the presidential campaign after the firms threatened to send mass notices just days before Election Day, tied to the date sequestration would take effect.
Stevens later said mass layoff notices were only a possibility because of the uncertainty with how the cuts would be implemented, but at that point the notices had already become a political talking point for Republicans blaming President Obama for the sequester.
The company is still warning that layoffs could be on the horizon due to sequestration, and it also conducted a round of buyouts unrelated to the cuts last month in a restructuring move.
“While we understand that the impacts are likely to play out over a period of time, we continue to believe that sequestration will lead to furlough in some situations and could trigger layoffs resulting in WARN notices to thousands of our current employees,” Lockheed said in a statement last month.