Market Overview

Private Companies Profit Big On Government Contracts

Share:
Private Companies Profit Big On Government Contracts
Related LMT
Army Fights For Ground In Cyberwar; When Will Twitter, Facebook Enlist?
Lockheed Martin Wins $584M Deal For Littoral Combat Ship
Barometer Capital Management Inc. Buys Lockheed Martin Corp, Rio Tinto PLC, Suncor Energy Inc, ... (GuruFocus)

There’s been a lot of talk about President Donald Trump’s plans to boost military spending by $54 billion, and a number of longtime defense contractors are poised to benefit — as are those in infrastructure — and space exploration.

And sundry sectors as the federal government seek to allocate an estimated $245 billion in contract opportunities this fiscal year.

Private businesses have long contributed to the operations of various federal departments, which entertain contracts for information technology, healthcare, research and other services.

As these vendors are private companies with aims to profit, the costs charged the government generally exceed the costs required to fill orders. In many cases, taxpayers spend far more than what the services are actually worth.

A Case Study On Private Profits

In 2015, the government contracted Lockheed Martin Corporation (NYSE: LMT) for services totaling $36.7 billion. That same year, Lockheed Martin’s operating costs were $36.26 billion.

In other words, that one government contract exceeded the company’s total annual expenses by about $440 million.

Related Link: How To Trade The Expected Expansion In U.S. Infrastructure

Of further note, the $36.26 billion spent throughout the year included services rendered not only for the federal government, but for all other clients, as well. According to Lockheed Martin’s 2015 Annual Report, only 78 percent of the company’s net sales came from U.S. government contracts.

So, for less than the amount that the U.S. government paid for Lockheed Martin services, the company filled its government order and an additional 22 percent of orders filed by outside clients.

In short, the business boasted excessive profits primarily from the federal taxpayer.

Concentrating Profits

Recent government activity may position some businesses for even greater profits.

Since 2015, the United States has taken measures to consolidate contract vehicles and limit the quantity of total deals awarded. As its contracted labor becomes more concentrated and singular companies begin to provide more comprehensive services, the government may entertain more deals of the Lockheed Martin size and find itself again outpacing contractor costs with the purchase price.

Click here to view more of Benzinga’s educational content.

Image Credit: By Chairman of the Joint Chiefs of Staff from Washington D.C, United States - 170206-D-VO565-028, Public Domain, via Wikimedia Commons

Posted-In: Donald TrumpEducation Previews Politics Top Stories Markets Trading Ideas General Best of Benzinga

 

Related Articles (LMT)

View Comments and Join the Discussion!
Loading...

Partner Center

Loading...