Boeing (BA) announced today that it will close a Kansas factory employing 2,160 people by the end of 2013, another indication that cuts to the U.S. defense budget are hurting the defense sector.
The Department of Defense is now considering a new strategy that could result in wider cuts, and defense programs may continue to lose out as Congress looks for ways to cut the deficit. Defense Secretary Leon Panetta will present the new defense strategy on Thursday.
JP Morgan analyst Joseph Nadol III expects stocks in the sector to modestly decline this year, unless some change in politics or the economy causes a shift in expectations. “In this context, we view the group to some degree as a market call, though other factors such as the outcome of sequestration, the election, any adjustment to the longer-term fiscal outlook, and M&A will play roles as well.”
Nadol’s three favorite stocks in the sector are Raytheon (RTN), General Dynamics (GD) and Lockheed Martin (LMT), in that order. He upgraded General Dynamics to Buy today: “Looking forward to 2012, we believe that the overhang on the defense business, at least relative to peers, is now mostly priced in, even if it is not yet captured in consensus earnings estimates. We look for Gulfstream to have a strong year as the G650 successfully enters service, and the final milestones on this front should serve as catalysts for the stock.”
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