If you were listening carefully, you may have heard a collective sigh of relief on Tuesday as Congress finally put down their dunce caps and approved a deal that kept the United States from defaulting. But, while the majority of the U.S. rejoiced, there were a few companies that let out an agonizing groan.
Which do you want first? The bad news or the bad news?
Although the exact details of the budget deal still have to be ironed out, one thing is for certain: Defense is taking a hit. A whopping $350 billion dollar hit, to be exact. According to the Fact Sheet released by the White House, over the next 10 years, the Base Defense Budget will face $350 billion in cuts -- the first defense cuts since the 1990s.
Moreover, the plan details that there will be a second round of cuts -- totaling $1.5 trillion -- that must be agreed upon by a special Congressional committee in November, and voted on by Congress no later than December 23, 2011. If the Committee is not able to reach an agreement, the deal automatically adds nearly $500 billion in defense cuts on top of the cuts already made.
Luckily for defense companies, the deal is structured in such a way as to provide strong incentives for both sides to agree before the deadline -- if both sides haven't agreed by the deadline, critical programs like infrastructure and education could face drastic cuts as well. Still, even without $500 billion in added cuts, $350 billion is a hard blow, and one that doesn't guarantee defense won't be cut again in November.
Show me the money... or at least where it's spent
Although the cuts are no doubt a hard blow, it's anything but unexpected. Over the past few months, defense spending has come under intense fire, and defense companies have had to justify their sometimes outrageous spending. Both Boeing (NYS: BA) and Lockheed Martin (NYS: LMT) have faced scrutiny; Boeing for its possibly overrun KC-46 tanker contract, and Lockheed for its massively overrun F-35 contract. So is now the time to get out of defense?
Not so fast
While overall stock prices have continued their downward slump, it's highly unlikely that defense companies will go belly up. With our nation's defense resting on their continued survival, it's more likely that you'll see defense companies like Northrop Grumman, General Dynamics (NYS: GD) , Textron (NYS: TXT) , and L-3 Communications (NYS: LLL) , looking to manage their projected costs while becoming increasingly competitive in contract bidding.
Plus, the negative news has already been factored into defense companies' stock prices, and with recent drops, many defense companies are trading at historically low valuations. Consequently, now might be a great time to buy in while prices are cheap. As an added bonus, all of the defense companies listed above pay a healthy dividend -- that's something any investor can love.
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At the time this article was published Fool contributor Katie Spence loves the cheap prices on Northrop Grumman's stock, and is planning on increasing her holdings in the next few days. She does not own stocks of any other company mentioned above. The Motley Fool owns shares of Lockheed Martin, General Dynamics, L-3 Communications Holdings, Northrop Grumman, and Textron. Motley Fool newsletter services have recommended buying shares of L-3 Communications Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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