The Sector That Will Bounce Back Once the Government Shutdown Is Over

By John Whitefoot

The U.S. government shutdown has turned some federal agencies into ghost towns, like NASA (with 97% of its workforce furloughed), the Department of Housing and Urban Development (96%), and the Department of Education (94%). Still, some agencies, like the Departments of Defense and Homeland Security—with just 18% and 14% of their staff on furlough, respectively—are considered more essential than others.

That said, those Department of Defense numbers may be a little misleading; military and contractor personnel were not affected by the U.S. government shutdown. Half of the Department of Defense’s civilian population of roughly 400,000 were furloughed without pay on October 1.

As a result, companies doing business with the Department of Defense will feel an immediate pinch to their bottom line. That’s in part because of civilian Department of Defense personnel performing audits and certifying military products and services—which they can’t do if they’re not working. An extended furlough also means government acquisition personnel cannot keep the military lifecycle going.

In light of the fact that roughly 10% of the manufacturing workforce in the U.S. is engaged in some form of defense production, the U.S. government shutdown could impact the U.S. economyon a larger scale than some imagine.

That said, the impact of the U.S. government shutdown on defense stocks will vary from company to company, depending on funding and other regulations. While smaller defense stocks tend to rely on government contracts for a larger percentage of their revenue than the biggest defense contractors, that doesn’t mean either will escape the U.S. government shutdown unscathed.

For example, The Boeing Company (NYSE/BA) warned that deliveries of some of its jets could be delayed as a result of the U.S. government shutdown. That’s because completed planes require final authorization by the Federal Aviation Administration before customers can take a delivery—and those particular FAA officials have been furloughed. (Source: Ostrower, J., “Boeing Warns of Possible Jet-Delivery Delays From Government Shutdown,” The Wall Street Journal, October 2, 2013.)

The day after the U.S. government shutdown was announced, United Technologies Corporation (NYSE/UTX), the sixth-largest U.S. government contractor, said its aerospace businesses would be forced to furlough thousands of workers due to the lack of government inspectors who audit and approve production of Black Hawk helicopters and other aircraft and weapons systems. In 2012, United Technologies received about 17% of its 2012 revenue from the U.S. government. (Source: “United Technologies Announces Government Shutdown Impact,” United Technologies Corp. web site, October 2, 2013.)

By the end of last week, the U.S. government shutdown had shaved 3.5% off of United Technologies’ share price; the S&P 500, on the other hand, climbed 0.2%.

On second thought, parts of the U.S. government shutdown didn’t sit well with Washington. Over the weekend, United Technologies reversed its plans to furlough as many as 4,000 workers after the Pentagon said most civilian employees sent home during the U.S. government shutdown would be put back to work, including inspectors who review contracted work. (Source: Burgess, T., “Furloughs called off: Companies call off furloughs, government shutdown eases,” Examiner.com, October 7, 2013.)

In the not-too-distant future, the U.S. government shutdown will end and the wheels of commerce will begin again. And once that happens, solid defense stocks like Huntington Ingalls Industries, Inc. HII, Hexcel Corporation HXL, and Spirit AeroSystems Holdings, Inc. SPR will see their share prices stabilize or rebound.

Investors who are interested in the U.S. aerospace and defense industry, but are uncertain about their stock-picking prowess, might want to consider researching the corresponding exchange-traded funds (ETFs), of which there are only two: PowerShares Aerospace & Defense PPA and iShares U.S. Aerospace & Defense ETF ITA.

When you consider that more than 50% of U.S. government spending goes to the military (mandatory and discretionary), it’s fair enough to say that the defense industry will bounce back from the U.S. government shutdown. (Source: Ananda, R., “More than 50% of US Government Spending Goes to the Military,” Global Research web site, March 27, 2013.)

This article The Sector That Will Bounce Back Once the Government Shutdown Is Over was originally published at Daily Gains Letter