Defense Industry Gets Reprieve

Source: Northrop Grumman Corp. via Bloomberg

A Northrop Grumman Corp. KC-45 air tanker refuels a plane in mid-air.

Shares of top defense contractors rose after U.S. lawmakers reached a last-minute deal to avert automatic spending cuts known as sequestration. Investors’ optimism may be short-lived.

The agreement would raise tax rates for the highest earners and extend unemployment benefits. It also delays the automatic cuts for two months, setting up a March 1 deadline for a longer-term fix that may prove elusive.

“It’s no longer about the revenue side. It’s only about the spend side, and that’s going to be a tough, tough battle,” said Stan Soloway, chief executive officer of the Professional Services Council, an Arlington, Virginia-based group that represents contractors such as SAIC Inc. and CACI International Inc.

Last night’s deal “does not erase any of the instability and uncertainty that has been vexing every federal agency” and contractors that support them, Soloway said in a phone interview.

The 10 biggest Pentagon contractors rose 1.5 percent in afternoon trading, compared with a 1.9 percent gain in the Standard & Poor’s 500 Index.

While the deal to delay sequestration is a “short-term positive” for defense stocks, the companies will probably underperform the broader market in the next two months as politicians spar over spending levels, William Loomis, a Baltimore-based analyst at Stifel Nicolaus & Co., said today.

“The risk of sequestration happening two months from now is actually higher than what it was this first time around,” Loomis said.

Defense Secretary Leon Panetta thanked lawmakers who voted to temporarily avert sequestration.

“Unfortunately, the cloud of sequestration remains,” Panetta said in a statement. “The responsibility now is to eliminate it as a threat by enacting balanced deficit reduction. Congress cannot continue to just kick the can down the road.”

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