President Obama was re-elected to a second term on Tuesday, providing some insight into the future of defense spending while leaving concerns over budgetary issues intact. At a base line, defense spending under the Obama Administration will likely decline, though not to drastic levels. The President’s 2012 – 2017 defense spending proposal had called for relatively flat defense spending, with a slight decline at a (0.9%) CAGR over the five years.
However, concerns over the near-term effects of the “fiscal cliff” persist. The Administration and Congress have until the end of the year to come to a budget agreement in order to avoid automatic, across-the-board cuts under sequestration. Given the lame duck session and the split Congress, reaching an agreement is far from certain, and both the DoD and the defense industry are preparing for the potential reductions in spending. In a speech on November 5th, DoD acquisition chief Frank Kendall announced that the Pentagon had begun planning for sequestration. However, leaders from both parties have indicated that the “fiscal cliff” negotiations are a priority and that both sides are open to a compromise.
In other news, the defense sector saw two major resignations on Friday, with CIA Director David Petraeus and incoming Lockheed Martin CEO Chris Kubasik both announcing they would leave their posts that afternoon. Petraeus resigned in the wake of an extramarital affair. Kubasik, who was slated to take over the defense contractor from current CEO Bob Stevens, was ousted following an investigation that determined his “close personal relationship” with a subordinate was against the company’s code of ethics. The company announced that Marillyn Hewson will be taking over as CEO on January 1.
Computer Sciences Corporation (Up 13.2%) – Shares were up for the week after the company announced earnings and issued updated FY13 guidance on Tuesday. It reported $0.58 EPS for the quarter, beating analyst expectations of $0.49. CSC provided FY13 EPS guidance of $2.30 – $2.50 per share, compared to consensus estimates of $2.29.
Chemring Group Plc (Down 12.9%) – Shares were down for the week following Carlyle’s announcement that it will not be submitting an offer for the company. The negotiations, originally announced on August 17th and extended twice, were overshadowed by a series of profit warnings issued by Chemring as well as a management shakeup late last month.
Kratos Defense & Security Solutions (Down 17.3%) – Shares were down for the week following the company’s earnings announcement on Thursday, which met EPS estimates of $0.18, but fell short of Net Income from Continuing Operations estimates of a $2.9m loss with an announced loss of $4.4m.
Thales Group has agreed to acquire Gentex Visionix, a provider of helmet mounted displays and motion tracking systems for defense and aerospace applications, for an undisclosed amount. The acquisition gives Thales the ability to offer highly capable HMD technology within the market, enhancing its ability to support warfighters with increased situational awareness.