April 24 - Defense companies are reporting higher earnings- but weakening revenues has the sector gearing up to battle some potentially tough times ahead. Bobbi Rebell reports.
Defense companies are coming in strong this earnings season. Profits are up, and margins have improved, and cost cutting is helping the bottom line. Boeing's first quarter earnings jumped nearly 20 percent- despite the grounding of its 787 Dreamliner. Northrop Grumman earnings and sales beat forecasts. And General Dynamics far exceeded earnings expectations. But all three reported disappointing revenue- as their military customers deal with looming budget cuts. Neal Dihora of Morningstar: SOUNDBITE: NEAL DIHORA, EQUITY ANALYST, MORNINGSTAR (ENGLISH) SAYING: "I think the uncertainty and the inability of the Department of Defense or Congress or anybody in the entire chain to figure out what number we should use to spend, or what is the actual authority, has got buyers of these goods in kind of a difficult position. They know they need things but they can't guarantee that the funds are going to be available. So they have to sit on their sidelines." It's tough to measure the future impact of the sequester related budget cuts- but the companies say they are bracing for impact. Investors liked what they heard- sending the stocks higher on Wednesday. SOUNDBITE: NEAL DIHORA, EQUITY ANALYST, MORNINGSTAR (ENGLISH) SAYING: "I think they know what they are up against. I think they know the environment. I think they know the budget I think they know that it's going to be hard sledding for the next three to four years and I think they are preparing accordingly and they have actually judiciously spend some of this cash to buy back shares or increase their dividend yield so I think the stocks have a lot of support." But Sarat Sethi, Managing Director at investment advisory firm Douglas C Lane has concerns about what all this preparation for budget cuts is doing to the company's ability to grow: SOUNDBITE: SARAT SETHI, MANAGING DIRECTOR, DOUGLAS C. LANE & ASSOCIATES (ENGLISH) SAYING: "I think it's going to have a pretty big effect because the uncertainty just of projects, and who they can hire is going to cause companies not to invest, not to put money into capital expenditure and that is eventually going to show on the bottom line because if you don't have growth you are just not going to actually be a company that has earnings growing forward." Defense is one of many sectors on guard because of sequestration- other businesses including airlines and the medical field are bracing for the true impact of the cuts.