Friday, September 14, 2012

Sequestration Effects

I am having a first look at the White House / OMB document which proposes the distribution of sequestration cuts.

Here is a link to the document (warning, it's a ~400 page pdf):

OMB Report Pursuant to the Sequestration Transparency Act of 2012 (P. L. 112–155)

Overall, it is clear that Federal contractors will be slammed very hard, across the board. We might see some reaction in the next few days, as businesses begin to project the toll. One has to remember that a cut in Federal labor often corresponds to a much larger contractor cut; we saw this recently during the recent FAA budget debacle.

The OMB document provides precious little specific detail; one merely sees, for example, that the National Institutes of Health (NIH) stands to lose $2.5B (see page 82 of the OMB document linked above).  The agencies and contractors need much more detail, and there will be much more preparatory work required within individual agencies over the coming weeks.

I expect all contractors to take a very large hit, and it appears that Federal and State (VA, MD) credit downgrades appear almost unavoidable at this point.

From an investment perspective, I would steer well clear of contractors to federal agencies. Here is a link to the top 100 federal contractors, in terms of net contract value:

Washington Technology 2012 Top 100 Contractor Rankings

Here is the top ten, from this link, arranged in terms of  2012 rank / name / net contract value / prior rank:

1Lockheed Martin Corp.$17,438,128,0001
2Northrop Grumman Corp.$9,143,329,0002
3Boeing Co.$7,455,878,0003
5Raytheon Co.$5,665,503,0004
6General Dynamics Corp.$5,461,177,0005
7Hewlett-Packard Co.$4,113,135,0007
8Booz Allen Hamilton$3,848,819,0009
9Computer Sciences Corp.$3,569,443,00011
10DynCorp International$3,346,227,00012

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