Industry Week in Review – August 17, 2012

With sequestration continuing to loom, some members of Congress are working toward a compromise.  Senators Lindsey Graham and Carl Levin have been working together within the Senate Armed Services committee in an attempt to delay defense cuts until May 2013. 

This plan includes compromises surrounding increasing revenues while maintaining tax rates by eliminating certain tax deductions and credits, such as deductions for whaling and corporate jets.  Rep. Bob Andrews, a member of the House Armed Services Committee has proposed delaying Medicare and Social Security eligibility, commenting that these “sacred” topics need to be discussed.  While no legislative action will take place during the August recess, this movement towards compromise may serve to ease concerns over Congress’ inability to avoid sequestration.

In addition, Governor Mitt Romney announced the Republican Vice Presidential candidate would be Paul Ryan, who is seen as both a budget hawk and a supporter of a strong U.S. military presence.  His comments during a speech to the Alexander Hamilton Society that defense is highly important were tempered by comments that a balanced budget is essential for U.S. power, both hard and soft.

Big Movers

Chemring Group Plc (Up 33%) Shares are up for the week as the military equipment maker announced they had received a preliminary expression of interest from The Carlyle Group.  Carlyle has until September 14 to make a firm bid.

Finmeccanica (Up 16.6%) – Shares are up for the week as news circulated that the Italian government would not stand in the way of previously discussed divestiture plans of “non-core” assets, which could include DRS Technologies.

Mercury Computer Systems, Inc. (Up 12.0%) – Shares are up for the week after the company announced it has received an initial order from a leading defense prime contractor to design an optimized high performance processing subsystem that will support unmanned aerial vehicles.  Shares were also bolstered by continuing coverage of the prior week’s Micronetics acquisition.

Smith & Wesson Holding Corporation (Down 14.2%) – Shares are down for the week after the company was downgraded by KeyBanc Capital Markets.  Analyst Scott Hammann noted that the firearms industry is at peak profitability, and that there is risk that these metrics could decline if sales were to moderate following the recent run-up in firearm demand.

Relevant Transactions

Piramal Enterprises Ltd. Acquired a 27.83% stake in BlueBird Aero Systems Ltd., an Israeli developer and manufacturer of UAS and peripheral equipment.  The deal, valued at $14 million, implies and Enterprise Value of $50.31 million.

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