With Defense Budget Settled, Buy These Defense Stocks

The Bipartisan Budget Act of 2015 has not only prevented a government shutdown and lifted the debt limit, it has increased both defense and domestic spending above the so-called “sequestration” spending caps. With this, it has resolved the President’s main opposition to the National Defense Authorization Act (“NDAA”) that led to his veto of the annual defense policy bill last month.

Overall, the new budget deal provided the Pentagon with a two-year budget certainty. This is especially important as defense programs require long-term strategic planning and multi-year acquisition contracts. Again, the agreement gives the military a higher budget than it would have witnessed under the spending caps. This provides some respite following six consecutive years of budget austerities.

The new agreement increased the security spending limit by about $25 billion to $548 billion for fiscal 2016. It also provided $58 billion in funding for the Pentagon’s separate war fund, the overseas contingency operations (“OCO”) fund.

However, the total defense top line for fiscal 2016 is about $5 billion short of the original White House budget request and the Republican congressional budget resolution. Congress had earlier wanted $612 billion but settled for $607 billion as part of a budgetary agreement with the White House.

Instead of overruling the President’s veto of the defense bill, Congress opted to cut $5 billion in defense spending authorized by the NDAA in line with the budget deal. The House has already passed the new bill this week and the Senate is preparing to vote next week.

Of the $5 billion defense policy bill cut, an easy $1 billion would come from estimated fuel savings while the balance will definitely hit the Pentagon hard.

Nevertheless, every fiscal year, no matter how constrained the funding picture, the Pentagon almost always gets its way. A classic example can be drawn from the recent third-quarter earnings session wherein the earnings beat ratio of all aerospace and defense companies is an impressive 77.8%. They were not only up against the ongoing budget austerity but were subject to a tepid economic growth scenario throughout the third quarter of 2015.