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Dodging the Budget Cutters' Axe

08/04/2010 11:18 am EST


Neil George

Editor, Profitable Investing

Neil George, editor of By George, finds a defense contractor that’s likely to fare relatively well as the administration looks for savings in the defense budget.

The [Obama] Administration is actually discussing cutting a bit of the trillions upon trillions of taxpayer dollars that make up the deficit-laden federal budget.

While this is great news coming from an administration that’s created a current deficit of over $1.3 trillion—[bumping] up the overall debt by more than 10% in one year alone—it might well cause some ills to some industries.

One key area getting a good look over is the US Department of Defense (DOD), one of the largest portions of the non-welfare (entitlements) portion of the budget.

For the current year, the official line-by-line operating budget for the Pentagon is running at over $517 billion—and with the expanded war [in Afghanistan], actual expenditures are running at an estimated $670 billion or so.

That’s real money—but still below the biggest chunks of cash flying out the door for welfare payments for Medicare, Medicaid, Social Security, and other programs that are still deemed untouchable, unfortunately, by the current government.

But let’s start with the DOD. The $517 billion-$670 billion has been ramping up at rates well above inflation over the past decade—more than 12% per annum. The directive from the administration and the current budget director Jack Lew is that they’d like to bring the budget for the DOD down to a hike of only 2% or so for next year.

Funny how Washington seems to be able to spin a lesser spending hike as a budget cut—but slowing spending hikes is at least a start.

But this is going to be a lobbying battlefield, because some of the easiest means of making major cuts in the DOD are considered off limits. Major contract deals for mega-ships, planes, and other union-oriented, job-intensive projects might as well be forgotten as targets.

Or—perhaps not?

Because the current wars don’t show signs of major improvements on the ground, US global military and nation-building/fixing efforts are less likely to see any cutbacks—so some of the mega-machinery deals might be on the chopping block, allowing the administration to get the budget down from the recent 12% annual gains to only 2% next year.

This means the big contractors held in many retirement accounts around the US—including Lockheed Martin (NYSE: LMT), Boeing (NYSE: BA), [and] Northrop Grumman (NYSE: NOC)—might well see some nasty surprises.

[But] General Dynamics (NYSE: GD) is perhaps the company best prepared to deal with austerity over at the Pentagon.

With a greater diversity of product and service lines across all facets of the DOD’s operations—particularly in dealing less with continuing Cold War projects and more with [Islamist] terrorism in the field—the company is not only less likely to face a nasty surprise budget cut; it’s actually more likely to get a bigger piece of the still ample 2% + hike in DOD spending proposed for next year. (GD stock closed below $63 Tuesday—Editor.)

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