Builders of naval vessels led by Huntington Ingalls Industries Inc. (HII) and makers of surveillance aircraft such as Northrop Grumman Corp. (NOC) may benefit once President Barack Obama’s new military strategy is translated into dollars.
The strategy presented by Obama and military leaders at the Pentagon yesterday emphasizes “the Asia-Pacific and the Middle East,” Defense Secretary Leon Panetta said at a news conference. Specifics won’t come until Obama presents his budget proposal next month, the first step in an effort to cut Pentagon spending by almost $490 billion through 2021.
The approach is likely to place a premium on naval power and drones, radar, tactical missiles and aircraft in order to thwart any effort by nations such as China or Iran to deny U.S. access to strategic regions including the South China Sea or the Persian Gulf, according to Jim McAleese of McAleese & Associates, a government-contracts consultant in Sterling, Virginia.
“Navy shipbuilding is the biggest winner because that addresses the fundamental area-denial threat, and Air Force aircraft is the second-biggest winner,” McAleese said in an interview yesterday.
Huntington of Newport News, Virginia, is the U.S. Navy’s largest builder of surface-warfare vessels. The company shares work on nuclear-powered submarines with General Dynamics Corp. (GD) of Falls Church, Virginia.
The strategy’s emphasis on cybersecurity may benefit companies that can help conduct attacks on adversaries’ computer networks as well as shield U.S. systems, Rodney Joffe, a senior vice president for NeuStar Inc. (NSR), a Sterling, Virginia-based data-management company, said in an interview.
“One of the ways I think we can get great bang for the buck is creating what our enemy already has -- really good offensive cyber capabilities,” Joffe said. “We should be able to get enormous leverage from investments in offensive cybersecurity.”
The strategy review also pledged to give priority to space programs. That may benefit Lockheed Martin Corp. (LMT)’s Advanced Extremely High Frequency satellite and its Space-Based Infrared System, Scott Pace, director of the Space Policy Institute at George Washington University in Washington, said in an interview.
Fewer Ground Vehicles
While deficit reduction will depend in part on reducing military personnel, makers of ground vehicles may be affected by cuts in Army procurement. Companies such as Oshkosh Corp. (OSK), Navistar International Corp. (NAV), BAE Systems Plc (BA/) and General Dynamics may be hurt by the shift in strategy, Robert Spingarn, an analyst in New York with Credit Suisse Group AG, said in a note to clients.
Force reductions and troop withdrawals from Iraq and Afghanistan may result in cutting spending on body armor, night- vision equipment, backpacks and small arms, according to a Bloomberg Government study in June by Sopen Shah, a defense analyst.
While the Pentagon strategy signaled areas that may benefit defense contractors, “we have no idea until we see the budget numbers,” said Michael Herson, president of American Defense International, a Washington lobbying and consulting firm whose clients include Northrop of Falls Church, Virginia, and General Atomics of San Diego, California.
No Dollar Signs
“We didn’t find a single dollar sign in the 16-page document summarizing the new strategy,” Byron Callan, director of defense analysis for Washington-based Capital Alpha Parters LLC, said in an e-mail.
Chief of Naval Operations Admiral Jonathan Greenert gave some hints last month of how the U.S. will increase its Asia presence and what companies may benefit. The Navy plans to station several of its new Littoral Combat Ships in Singapore to counter piracy and in Bahrain for Persian Gulf mine-sweeping operations, Greenert wrote in Proceedings Magazine, published by the U.S. Naval Institute.
The deployments will add to the role of what’s now a 55- ship, $37.4 billion program produced in separate designs by teams of Lockheed of Bethesda, Maryland and Austal Ltd. (ASB) of Henderson, Australia.
Greenert also said the Navy will deploy on its vessels a “larger and improved force” of rotary-wing drones such as Northrop’s Fire Scout.
The military strategy calls for development of a new long- range stealth bomber as part of the strategy’s goal to have weapons able to reach areas far from bases where “our access and freedom to operate are challenged.”
The development of the aircraft will be the first new bomber design in about three decades, since Northrop’s B-2. Lockheed and Chicago-based Boeing Co. (BA) may compete for the aircraft.
The strategy offered yesterday may be moot if Congress and Obama don’t agree on ways to undo an additional $500 billion in defense cuts slated to start in January 2013, said Herson of American Defense International.
Defense budget decisions this year will be sharply disputed, Tom Captain, U.S. sector leader for aerospace and defense at Deloitte LLP in New York, said in an interview.
“The real challenge is being able to afford these non- negotiable new requirements,” Captain said. “My question is how can we afford all this.”
A congressional supercommittee assigned to reduce the deficit by at least $1.2 trillion failed to reach agreement in November. That triggered automatic defense cuts of $500 billion, excluding interest savings, as stipulated under the budget control act Obama signed into law in August.
In addition, Obama’s strategic priorities may be undone if he is defeated by a Republican in the November elections, Herson said.
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