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Budget-Deal Winners: Boeing, Other Defense Contractors

Stocks in this article: BA LMT RTN NOC GD

NEW YORK (TheStreet) -- While the stock market should applaud a congressional budget deal to avoid another government shutdown, defense-sector stocks starting with Lockheed Martin (LMT), Boeing (BA), Raytheon (RTN), Northrop Grumman (NOC) and General Dynamics (GD) should be cheering the loudest.

Without the bipartisan deal, defense spending would have cut significantly in 2014 and beyond. The 2011 Budget Control Act required federal discretionary spending to fall from $986 billion in 2013 to $967 billion in 2014. However, the new agreement rolls back the automatic "sequestration" cuts to defense jobs from the last two years in addition to protecting spending for the next two years.

The size of the military for the United States has already been greatly reduced.

John Lehman, the Secretary of the Navy under President Ronald Reagan, warned in a recent op-ed, "Instead of a 600-ship Navy, we now have a 280-ship Navy...Instead of Reagan's 20-division Army, we have only 10-division equivalents. The Air Force has fewer than half the number of fighters and bombers it had 30 years ago....While the fighting forces have steadily shrunk by more than half since the early 1990s, the civilian and uniformed bureaucracy has more than doubled."

It is Boeing, Raytheon, Lockheed Martin, General Dynamics, Northrop Grumman and others that compete for that dwindling business of jets and ships.

Under the deal the funding of military pensions is being revised to allow for more spending in other areas. That protects the outlays for the hardware and services from the Pentagon, and helps the bottom line of these companies. Lockheed Martin received almost $45 billion in defense contracts in 2012, the most of any. Next was Boeing at $31.3 billion. For Raytheon, it was $22.7 billion. The federal government cut checks to General Dynamics for $21 billion and Northrup Grumman got $20.6 billion last year.

With Congress returning to the budget process, appropriations bills will again be passed to fund the United States government, as required by law. Investors hate uncertainty and this brings order back into what has become a chaotic budget process.

In 2013, the federal budget deficit was 4.3% of GDP, down from 6.8% of GDP in 2012. According to the Congressional Budget Office, the federal budget deficit should continue shrinking over the next two years as a percentage of GDP. With the federal budget deficit declining, the impact of the Federal Reserve "tapering" of asset purchases will be mitigated.

In the meantime, spending for the military will increase over the next two years. More important is that Congress, with mid-term elections less than a year away, is willing to take the political heat to reduce military pensions to finance other Pentagon programs. Those are very bullish actions taken by Congress to protect the defense community.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Yates is a financial writer who has had thousands of articles appear in periodicals and Web sites such as TheStreet, Newsweek, The Washington Post and many others. Much of his career was spent working on Capitol Hill for Members of Congress in both the House and Senate, on both committee and personal staff.  He was also General Counsel for a publicly traded corporation.  He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University.

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