By Doug Cameron
The Pentagon on Tuesday detailed plans to stabilize spending on
weapons buying and research, earmarking additional funds for
aircraft, helicopters and missile-defense systems.
Industry executives, however, remained cautious about their
enactment ahead of congressional wrangling over the $495.6 billion
baseline budget for fiscal 2015.
Funding for procurement and research falls 1.6% to $154.2
billion in the fiscal 2015 budget proposal sent to the president on
Tuesday, though a separate $26 billion in additional spending
earmarked for "readiness" includes direct equipment spending that
would be a boost for most of the large defense contractors.
The supplementary fund's chances of surviving congressional
scrutiny are viewed by observers as slim, while new programs due to
start include initial funding to develop a new training plane for
the U.S. Air Force and updated missile-defense systems.
Boeing Co., Lockheed Martin Corp., Northrop Grumman Corp.,
United Technologies Corp. and General Atomics LLC are among those
who would benefit from the proposed boost, and defense stocks all
advanced earlier gains after the budget was released.
There was no initial mention of funding for additional Boeing
F/A-18 jets for the Navy or the proposed combat-rescue-helicopter
program in which United Technologies' Sikorsky Aircraft unit is the
sole bidder. Boeing has warned it may have to close the F/A-18 line
in 2016 unless it can secure more domestic or international orders.
Officials from both companies continued to examine additional
budget materials Tuesday for any signs of potential funding.
The Pentagon's procurement and research budget is the key focus
for contractors. Though it accounts for half the department's
budget, it has borne the brunt of a series of mandated cuts,
declining by an average of 7% a year since fiscal 2011, including a
4% sequential decline in the fiscal 2014 budget.
Procurement would drop to $90.7 billion in fiscal 2015 from
$93.7 billion, with research spending rising to $63.5 billion from
$62.9 billion, excluding Overseas Contingency Operations, or OCO,
funding largely directed to operations in Afghanistan.
Defense company executives have said in recent weeks that they
expected fiscal 2014 to mark the bottom for the Pentagon's recent
procurement and research spending cuts, with even a flat outlook
for U.S. spending countered by the prospect of more international
sales.
Shares broadly outperformed gains in the wider market by midday
Tuesday, with companies focused on providing services--which
typically account for half of the Pentagon's procurement
budget--outperforming the big prime contractors such as Lockheed
and Raytheon Co.
The sector's best performer was Booz Allen Hamilton Holding
Corp, up 4.2% at $22.20, with Northrop Grumman Corp. the best
placed of the prime contractors, recently up 2.7% at $124.26.
The 2015 budget also included a $79.4 billion placeholder for
Overseas Contingency Operations, which is closely watched by
service and logistics providers. The request is in line with last
year though below the $85 billion actually appropriated by
Congress.
Some $5.1 billion was earmarked for cyberwarfare capabilities,
though Pentagon officials didn't detail how this would be applied
to individual programs.
The fiscal 2015 budget request first outlined last week by
Defense Secretary Chuck Hagel protects most of the Pentagon's major
programs in return for a limited range of cuts, retiring some older
aircraft and helicopters and shedding a planned armored combat
vehicle for the Army. New projects include revamping part of a
ground-based missile-defense system currently built by Raytheon, $1
billion for a more fuel-efficient jet engine and plans for a new
Navy surface ship.
Mr. Hagel's proposals will trigger a period of horse trading
between the Pentagon and Congress to determine the ultimate funding
for individual programs. If the broad plan is adopted, it wouldn't
provide defense contractors with any major immediate gains, but
would provide more certainty and allow them to make longer-term
investment decisions.
Lockheed would secure orders for two more F-35 fighters as part
of the $26 billion "Opportunity, Growth and Security Initiative,"
as well as 10 C130J cargo planes. Boeing could receive deals for 26
Apache helicopters and eight more P-8A Poseidon surveillance jets,
having last month secured a 16-plane deal that moves the program to
full-rate production for the first time.
Write to Doug Cameron at doug.cameron@wsj.com
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