How Will Sequestration Affect the Defense Industry: Lockheed Martin Corporation (LMT) and More

As for Northrup Grumman, the company supplies drones (the use of which has become a controversial issue for the Obama Administration), satellites and numerous other products primarily for the DOD and the various intelligence agencies. The company implemented sequestration contingency plans with an initial round of layoffs in Q3 of 2012.

NOC reported an 80 percent increase in 2012 fourth-quarter profit, but revenue was lower. Fourth-quarter earnings were $550 million, or $2.09 a share, compared with $306 million, or $1.03 a share, in the same period in 2011. Like Lockheed and Raytheon, Northrup said earnings and sales would drop this year because of the uncertain military spending environment.

Sequestration is not a fait accompli. A compromise short term budget deal could be cobbled together before March 1. Moreover, last week GOP lawmakers in both chambers proposed legislation that would reduce the federal workforce through attrition to avoid sequestration for one year.

The 2013 Down Payment to Protect National Security Act would cut the entire government workforce by 10 percent through attrition at an estimated savings of $85 billion over the next decade. And the Defense Department’s civilian workforce would be cut to its 2009 levels.

In sum, the bill would limit federal agencies to hiring one person for every three employees who retire or leave their job. The hiring reduction would be spread out over the next four to five years, but the savings are designed for a 10 year time period. At the end of the day, if the bill passes (which is highly uncertain), it would only be a stop gap measure that will create more economic uncertainty.

The bottom line: investors in the defense sector should stand pat and hold, as most analysts have suggested, and hope that March 1^st brings clarity, if not fiscal sanity. However, fiscal sanity is a rare commodity inside the Capitol Beltway.

The article How Will Sequestration Affect the Defense Industry originally appeared on Fool.com and is written by Kyle Colona.

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