“This will be a nail-biter to the very end,” defense consultant Jim McAleese told Reuters on Wednesday.
McAleese said the ultimate compromise over spending cuts would likely trim the Obama administration’s budget request for fiscal 2013 by $20 billion to $26 billion, or nearly half of the proposed annual cut of $55 billion under the pending sequestration.
“The election removes some uncertainty, though we think many investors had already anticipated that President Obama would be re-elected,” said Rob Stallard with RBC Capital Markets.
“The focus now shifts to the fiscal cliff, and the associated sequester,” he said, adding that reaching a deal “could still be a fraught process, given the lack of co-operation and willingness to compromise between the two parties over the last two years.”
Stallard said defense stocks had largely rallied with the market this year but could see greater pressure “if the fiscal cliff deadline starts to loom and no progress is being made.”
Frank Kendall, the Pentagon’s top arms buyer, on Monday said he expected U.S. lawmakers to agree in coming weeks to delay implementation of the automatic defense spending cuts. He said no one in Congress wanted the cuts to kick in on January 2 and Obama was determined to avert the reductions.
Lockheed Martin and other U.S. defense contractors have been warning for over a year that uncertainty about future budget levels is depressing investment in facilities, hiring and mergers and acquisitions.
Lockheed, Northrop Grumman, Boeing, and Raytheon told investors last month that they were focused on cutting costs and drumming up foreign sales to maintain profits, amid a long cycle of budget challenges after more than a decade of growth.
But Kendall said the Pentagon is listening to industry’s concerns. He is due to unveil additional measures next week aimed at reducing cost overruns on weapons programs, including a bigger focus on promoting exports of U.S. technology, a move likely to be welcomed by industry.
The Pentagon this week announced $7.6 billion in potential sales of Lockheed missile defense systems to the United Arab Emirates and Qatar, and analysts see additional sales in this area on the horizon.