Friday's historic basketball game between the University of North Carolina and Michigan State University paired two storied programs for a showdown on the deck of the USS Carl Vinson. While most people watching the game probably focused on the spectacular and unprecedented outdoor setting, or the presence of President Obama and the First Lady, or even the marquee match-up between coaches Tom Izzo of Michigan State and Roy Williams of North Carolina, the savvy investor may have been looking past all of this to the deck of the Carl Vinson with a simple question: "Who, exactly, is getting paid to build these things?"
Super Committee Cuts Could Hurt Sector
Any consideration of stocks from the defense sector would clearly be affected by the pending decision by the SuperComittee as the Nov. 23 deadline fast approaches. Should the SuperCommittee fail to find a compromise acceptable to both parties in Congress, implausible as that may seem, automatic spending cuts of $1.2 trillion would be triggered. These cuts would hit the Defense Department harder than anywhere else, with $500 billion of the cuts coming from the Pentagon. For investors speculating on the tack the SuperCommittee may take and the future of defense contractors, here are some companies that could be worth a look.
One good place to start might be the company actually responsible for the construction of the USS Carl Vinson, Newport News Shipbuilding, as the story of the company over the last decade provides some insight into the defense industry as a whole . At the time the USS Carl Vinson was built (launched in 1980), Newport was the largest privately owned in the United States. However, Newport was purchased by Northrup Grumman (NOC) in 2001. Northrup Grumman, formed in 1994 when Northrop purchased Grumman, is one of the titans of the defense industry with a market cap of over $15 billion and diversified interests that include but aren't limited to aviation, nautical technology, and cyber security. Northrop Grumman has had an up-and-down year, seeing its stock plunge from over $70 a share in early July down to a 52-week low of $49.20 per share in early August when the creation of the SuperCommittee and the potential mandatory cuts to defense spending were announced. However, the last couple of months have seen the stock rebound, gaining nearly 20 percent.
However, the story of Newport changed again in March of this year when Northrup Grumman decided to spin off its shipbuilding segment into the company Huntington Ingalls Industries, Inc. (HII) and included Newport News. Since then, the new company, with a market cap of almost $1.5 billion, has seen a steady decline in share price, losing over a quarter of its value since the start of April. Huntington, though, has posted gains since reaching its 52-week low of $22.62 a share in early October, rallying over 30 percent in the last two months.
Two of the biggest publicly traded companies that serve the defense sector are actually aviation companies that do work for both the Pentagon and consumer companies: Honeywell International, Inc. (HON) and The Boeing Company (BA). Both companies feature large market caps (Boeing over $50 billion and Honeywell over $40 billion), both serve both the commercial and defense side of the industry, and both have recently been in the news.
The Seattle-based Boeing, founded in 1916, has been a dominant force in airplane manufacturing for decades. Boeing is responsible for the manufacture of military aircraft, passenger aircraft, satellites, missile defense, and even manned space craft. Boeing has been having a mixed year, seeing its stock peak at over $80 a share in May before falling to $56 a share in August. Now trading at close to $68 a share, the company is up 4 percent on the year. Boeing was in the news in October for debuting its much anticipated new 787, a commercial jet dubbed the "Dreamliner" for its luxurious and spacious mode of travel.
New Jersey-based Honeywell Industries, founded in 1906, is an aerospace engineering company that performs a number of services for the Pentagon, including the manufacturing of non-nuclear components in nuclear weapons. In a familiar pattern, Honeywell reached highs over the summer before experiencing an August swoon that corresponded with the creation of the SuperCommittee. However, Honeywell has bounced back over 30 percent from its 52-week low. The company has been in the news again recently with an October earnings report showing a 14-percent jump in sales and a week later announced a new 12-percent increase on their dividend to begin in Q4 2011. Honeywell also broke the news today that they had reached a new distribution agreement for the United Arab Emirates with aerospace service supplier Global Aerospace Logistics (GAL).