And So It Begins: Boeing Announces Cuts to Defense Division
There were two hurdles investors and business people were worried about. The first was the presidential election; the second was the fiscal cliff. While the presidential election has concluded, the ensuing gridlock that will now become a reality has many investors and business leaders worried that no definitive steps will be taken to help secure America’s future in the short term.
The earnings outlook appears bleak for many industries, and budget cuts are now becoming closer to a reality. While there were optimists hoping that one party would be in charge of both the White House and the House of Representatives, this split means a greater risk of not being able to compromise and come up with a deal to stop the harsh budget cuts set to be enacted in 2013.
The earnings outlook has been poor this financial reporting season, with a high level of earnings warnings. With President Obama stating that he’s in favor of higher dividend taxes, higher capital gains taxes, and greater regulation and increased costs associated with running a business, and with the inability of the Democrats to work with the Republicans in eliminating massive budget cuts, many investors are worried and are selling stocks ahead of these headwinds.
The Boeing Company (NYSE/BA) has just announced what I think will be a common theme—more budget cuts. Boeing stated that in its defense division, the firm will cut 30% of management jobs from its 2010 levels. The company will also be closing facilities in California and eliminating several business units to meet its goal for massive budget cuts. (Source: “Boeing announces defense division restructuring,” Reuters, November 7, 2012.)
With the lack of visibility in eliminating the fiscal cliff, many in the defense industry are anticipating large budget cuts. This negative earnings outlook is forcing companies to massively restructure and downsize. Boeing, the second-largest supplier to the Pentagon, is looking for $4.0 billion in total savings to try to improve its earnings outlook amid a forecast of massive defense budget cuts.
Boeing did state that these cuts were not in response to the fiscal cliff budget cuts or the presidential election. While that’s its public stance, I believe that this level of uncertainty is certainly a factor. In addition, I believe company management has been listening to what Obama has been stating in his goal of reducing military spending, making the necessary budget cuts to maintain a solid earnings outlook for its business.
While the commercial jet business is holding up well, approximately 40% of Boeing’s revenue comes from the defense division. With defense budget cuts looking to be more likely following the re-election of Obama, I think this will weigh heavily on the earnings outlook for all firms in the defense sector. When combined with higher taxes on capital gains and dividends, many investors will be looking for the exit.