British prime minister David Cameron has just finished unveiling fiscal cuts to the country’s armed forces at pixel time on Tuesday.
Quick highlights — British troops will finally leave their Cold War German bases in 2020, only 29 years after the Soviet Union fell; defence spending will fall by 8 per cent in real terms; a lot of blood in the water for the Royal Navy’s fleet.
And the defence company implications — intriguingly diverse.
Data Explorers have an interesting take on the issue, as seen via short interest in relevant companies.BAE and other large contractors are too diversified in their exposure to cuts — especially within the US 2011 military budget — to interest short-sellers:
There is a noticeable trend for institutional investors to sell out of big companies such as BAE, Lockheed Martin and Cobham and short sellers are not active given the long term nature of the contracts. However, they are shorting certain more specialized firms which sell military related goods to the Government such as FLIR, Aeorvir, Taser and Qinetiq.
Short sellers are negative on the outlook for certain smaller defense specialists who nervously await the US defense budget for 2011. One of these is thermal imaging firm FLIR Systems (FLIR) which relies on the US government for a third of its sales… short interest is taking off in the UK’s defense consultancy Qinetiq Group (QQ.) and is at 4% of total shares while the price is slowly drifting lower.
Although, of course, Cameron’s announcement was still enough to simply thwack shares in UK defence engineering firm Babcock on Tuesday:
And here, via a City broker, is a bit more colour on that fall:
BABCOCK – just come off a 1 one 1 call with +our analyst has fd of babcock and he has been guided down 10% on eps for 2012. 3 reasons: 1. VT jv revenues are growing more slowly than expected 2. Bid costs are going up 3. the new contract hiatus they think will be another 18m (Serco saying 12m) and so the new revenue they might have expected doesn’t hit the 2012 numbers.
It feels like a timing issue because there will be new bigger contracts awarded and bid costs going up slightly proves the point. XCahnging , Mouchel , Carillion, VT . BAB, Connaught have all warned in the last 6 weeks ..leaves SERCO on 18x looking expossed
(NB Grammar, spelling, typos – nothing to do with FT Alphaville).
Related link:
How the carriers sank a defence strategy – FT