Money & Investing Military Maneuvers

Here is an interesting article from Forbes

http://www.forbes.com/forbes/2009/0202/038.html?partner=email

Money & Investing Military Maneuvers
Brian Wingfield 02.02.09
Two years ago it seemed reasonable to assume that if Barack Obama were ever elected President, he would drastically and immediately slash defense spending. He opposed the war in Iraq and was part of the Democratic chorus chastising President Bush for defense profligacy.
The reality of defending a country in a world full of tyrants, terrorists and pirates puts a different perspective on the budget. Even with U.S. troops expected to leave Iraq by 2011, defense outlays won’t shrink much right away. The budget calls for $605 billion in defense spending for the fiscal year that ends Sept. 30. Experts at Obama’s favorite think tank, the Center for American Progress, want him to let this outlay rise with inflation during the next four years.
That said, the new Administration will undoubtedly slice the Pentagon pie differently. The reupped defense secretary, Robert Gates, has himself called for “balance” in military spending. Translation: less emphasis on blunt force, more on precision and preparedness. And whenever the military shifts gears, that’s the time to look for business opportunities.
One fertile area is cybersecurity. In late November reports surfaced that computers had been attacked at U.S. Central Command, possibly from inside Russia. Chinese cyberspying is another worry. Good news for a firm like ManTech International, which specializes in government data-processing services. In August ManTech bought Emerging Technologies Group for an undisclosed amount to expand its cybersecurity operations. The deal is expected to generate $20 million in revenue in 2009.
Michael Lewis, a defense analyst at BB&T Capital Markets, is also keen on firms that help the military deal with threats from terrorists and other nonstate actors. Two industry darlings in this area: AeroVironment, which holds a $46 million Army contract for its Raven unmanned aircraft, and Flir Systems, a maker of night-vision and other camera equipment used by the military and law enforcement, including border patrol units. In October it received a $28.9 million award to outfit the Army’s Medevac Black Hawk helicopters with long-range imaging sensors.
Another winner: CACI International, which just renewed one of its biggest contracts, a $452 million deal to supply the Army with electronic intelligence equipment.
At risk are companies that can’t quickly maneuver away from expensive Cold War legacy programs such as submarines and missile defense systems. JSA Research analyst Richard Whittington is bearish on Teledyne Technologies because of its missile business. He’s also down on outsourcing firms like L-3 Communications, which performs aircraft maintenance, on the theory that Democrats will cut such contracts, bringing some of that work back in-house.
Also vulnerable are companies heavily dependent on expensive new high-tech programs, which now go under the rubric of Future Combat Systems. Boeing and Science Applications International Corp., for example, jointly manage the massive project, which has been plagued by delays and cost concerns. The still-in-development F-35 Joint Strike Fighter, with Lockheed Martin as the prime contractor, and the three-year-old Lockheed/Boeing F-22 Raptor, could also take a hit.
But heavyweight contractors will get some air support from congressmen, whose districts are at risk of losing jobs. U.S.-made weapons systems are also hard to kill off because of the political damage cancelations would do with buyers such as Britain, Italy and the Netherlands.
“You can’t cut the Joint Strike Fighter without alienating a dozen allies,” says Dov Zakheim, a defense analyst at Booz Allen Hamilton who used to be the Pentagon’s chief financial officer. Still, over time it’s likely big players will see a reduction in volume as military spending declines.
Stealth and SmartsPresident Obama's military is unlikely to shrink much, if at all. But its procurement priorities are likely to shift from blunt force to precision and preparedness.