The 2010 U.S. defense budgetThe 2010 U.S. defense budget creates winners and losers

Published 7 May 2009

The proposed 2010 U.S. defense budget is 4 percent larger than last year’s budget, but the cancellation of major weapon systems and the reorientation toward a nimbler, lighter military will see some defense contractors win while others will be disappointed; major winners will be defense contractors involved in cyber security, intelligence, surveillance and reconnaissance

There is a debate about the origin of the phrase “a rising tide lifts all boats.” It is said to have been coined by Seán Lemass, the Irish Taoiseach in 1959–66. Lemass himself attributed the phrase to John F. Kennedy. Kennedy employed the expression to combat criticisms that a dam project he was inaugurating was a pork barrel project. This etymological debate notwithstanding, at times a rising tide does not lift all boats. In evidence: The 2010 U.S. defense budget. It is 4 percent larger than last year’s budget, yet, if approved by Congress, there will be defense contractors whose boats will be lifted, while the boats of others will begin to take water.

Lisa Springer writes that the budget, to be presented by Defense Secretary Robert Gates, offers growth prospects for defense contractors involved in cyber security, intelligence, surveillance and reconnaissance, but disappointments for big ticket programs such as F-22 fighter jets, combat search and rescue helicopters, and missile intercepting lasers. Gates’s budget includes major changes to more than fifty weapons programs, some cancellations, and increased funding to a select few. At $534 billion, the 2010 budget is 4 percent higher than last year and nearly double U.S. annual defense budget in the year leading up to the 9/11 terrorist attacks. Gates is also seeking supplemental funding of $130 billion for the wars in Iraq and Afghanistan next year, down from $141.4 billion in supplemental funding for these operations in the current fiscal year.

Major programs that lost funding include:

  • Ground-based missile defense
  • Army ground vehicle modernization
  • Military transport C-17 aircraft programs managed by Boeing (NYSE: BA)
  • The DDG-1000 Navy destroyer program jointly managed by Northrop Grumman (NYSE: NOC) and General Dynamics (NYSE: GD).

Gates’s budget shifts spending away from big ticket defense programs conceived during the cold war to smaller programs that have already proven their usefulness in combat such as the UAVs used to combat insurgents in Afghanistan, Iraq, and Pakistan. Gates’s request for a $2.0 billion increase in cyber security and reconnaissance spending for 2010 is a positive development for prime contractors Lockheed Martin ( NYSE: LMT), Northrop Grumman, and Raytheon (NYSE:RTN), who have already established substantial capabilities in this segment.

Springer notes that share prices for several of the major defense contractors rose after the new budget was announced because spending cuts were not as deep as many investors had feared. Lockheed Martin will see funding reductions in some areas but overall fared reasonably well under the new budget.