Tuesday, March 31, 2009

More Evidence of Pentagon Budget Cuts...Will it Actually Happen?

Yesterday I mentioned Raytheon (RTN) for an investment at these levels. Today, we find a little more news on the subject.

A Senate defense committee chairman says Pentagon budget will include large, painful cuts. Senate Armed Services Committee Chairman Carl Levin said Tuesday that major program cuts will not be pushed off until the 2011 budget, but will be included when Defense Secretary Robert Gates sends his spending plan to the president later this month.

Levin's comments confirmed what many contractors and military leaders have expected, but he offered no details on which programs may be axed. He said Pentagon officials have indicated they will not be able to submit the much-anticipated spending plan by April 21, as initially hoped.

What does this mean? For now, not much. This thesis has been priced into all defense stocks, and thats why I like Raytheon's valution. I'm actually a believer that we spend far too much money on certain aspects of defense, and there would be a lot of ways to intelligently trim the budget. But the government doesn't really work that way. Its more likely to move in larger, more sweeping movements. And although President Obama was in favor of making some major changes, as of right now, he appears to be becoming more conservative in terms of policy (I don't mean fiscally conservative, I mean conservative as in not changing).

So what I mean is that its still unlikely to see a huge cut in defense spending. If significant changes do come, it won't be for a few years and the near term outlook for these stocks, especially Raytheon, remains strong. They just raised their dividend and have a strong balance sheet. I like the stock in the near term.

No current position, but considering.

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