Defense Battles Domestic Spending Cuts While International Opportunities Grow: A Wall Street Transcript Interview with Brian W. Ruttenbur, Managing Director from the CRT Capital Group

Wall Street Transcript

67 WALL STREET, New York - December 3, 2013 - The Wall Street Transcript has just published its Industrial Equipment, Aerospace and Defense Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Defense Budget Uncertainty - Capital Equipment Technology Investing - Growth Opportunities in Data Security - International Consumption Growth - Professional Security Equipment

Companies include: Lockheed Martin Corporation (LMT), OSI Systems, Inc. (OSIS), NICE Systems Ltd. (NICE), General Dynamics Corp. (GD)

In the following excerpt from the Industrial Equipment, Aerospace and Defense Report, an experienced analyst discusses the outlook for the sector for investors:

TWST: I was going to ask you about the uncertainty in Washington over the budget and its impact on the Department of Defense budgets. Are you expecting things to get worse?

Mr. Ruttenbur: Yes. We have not really seen the big cuts happen yet. Sequestration-level cuts will not be in full effect, in my opinion, until fiscal 2015. And the OCO budget, which is the Overseas Contingency that funds the war in Afghanistan, that largely goes away the end of calendar 2014. We're down to 33,000 troops; four months ago we had 66,000 troops on the ground in Afghanistan.

Our combat operations are over with in Afghanistan. We're playing support roles, and as those support roles come down, we go from 55 bases in Afghanistan down to five bases. Then the number of troops dramatically decreases. So I see that there's going to be a shrinking budget in defense, from both sequestration core budget cuts as well as the Overseas Contingency cuts as we pull out of Afghanistan.

TWST: Last week Lockheed announced job cuts. What are your thoughts on that, and do you expect other companies will take similar actions?

Mr. Ruttenbur: My opinion is there's going to be a lot more job cuts coming in the defense industry. Lockheed (LMT) is the leader; they were the first to start increasing their dividend, and everybody else followed. I think that they are going to be the first in rightsizing their cost structure, and everyone else will follow. We've seen some of this from some of the smaller services providers, but in terms of a defense prime, they are the first ones to really start cutting. Other prime contractors diversified and sold their divisions they didn't want. What we see going forward is lots of cuts to come.

TWST: Tell us a bit about the areas where you do see positive trends; you mentioned international growth in security area as one.

Mr. Ruttenbur: Now that I've been so dire - on the positive side, the international opportunities are very large. All the defense companies talk about the growth opportunities in the Middle East and certain parts of Asia - that's where the demand is for U.S. products and services, and that's where there's going to be growth. There will be shrinkage in the U.S., but growth internationally. There's the positive.

The other positive, frankly, is that in the near term most of these companies are going to have incredible cash flows, near record levels of cash flows. The cuts have not started yet and probably won't start to their full extent for another six to 12 months at least, so the cash flows in the near term are extremely strong...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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