AP News

Sector Snap: Defense Contractors


WASHINGTON (AP) — Shares of smaller defense contractors fell Wednesday as analysts warned that those companies could take a heavy financial toll from billions of dollars in automatic spending cuts.

AeroVironment Inc. plunged more than 10 percent in trading a day after reporting lower-than-expected quarterly results because of delays in government orders. The Monrovia, Calif.-based company makes the unmanned drone aircraft used by the U.S. military on missions around the world. The company said that order delays could seriously hurt its financial performance for the year.

Delays could become the norm for companies that rely on the Defense Department for business, as the entire federal government deals with sweeping automatic spending cuts. The $85 billion in cuts were designed to force the Obama administration and a bitterly divided Congress to come up with an alternative for trimming the country's deficit. They didn't, which now leaves agencies with the challenge of chopping their budgets.

Sterne Agee analyst Peter Arment said in a research note that larger defense contractors may be able to weather the delays, since they often have backlogs of government contractors.

"Smaller organizations do not have that ability and therefore are much more impacted by short-term delays," Arment said. He noted that General Dynamics has already taken a write-down on business in the last quarter of 2012. "However, we expect lingering signs of delays to remain throughout 2013 within their service operations."

Arment has a "Neutral" rating on AeroVironment and a "Buy" on General Dynamics Corp.

About 800,000 defense department civilians are expected to lose a day's pay each week for more than five months under the federal budget cuts. The Army will let go more than 3,000 temporary and contract employees, and beginning in April it will cancel maintenance at depots, forcing 5,000 more layoffs.

AeroVironment Inc. shares fell $1.81, or 8.3 percent, to $19.88 in afternoon trading. General Dynamics Corp. rose 12 cents to $67.79.

Harris Corporation fell $1.62, or 3.4 percent, to $45.61. The KEYW Holding Corp. fell 37 cents, or 2.6 percent, to $13.71.


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