After the partial U.S. government shutdown announcement on Oct 1, 2013, Lockheed Martin Corp. (LMT - Analyst Report) announced the layoff of 3,000 employees beginning on Oct 7, 2013. Consequently, the share price of the leading defense prime dropped 3.9% from Oct 1 to end at $122.50 at the close of session on Oct 4, 2013.
On Oct 1, 2013, the U.S. government began a partial shutdown after the two houses of Congress, the House of Representatives and the Senate, failed to reach a consensus on a new budget and pass a budget before the start of the financial year. As a result, more than 700,000 federal employees face unpaid leave with no guarantee of back pay once the deadlock is over. It is the first shutdown in 17 years.
The premier defense contractor working on the staggering $392 billion F-35 fighter jet program indicated that it would continue to lay off more employees if the shutdown continues. However, it did not specify numbers. The layoff has been triggered by the closure of government facilities where work is usually performed on awarded contracts. Moreover, the defense government business is subject to inspection which cannot be executed now as the federal employees are on unpaid leave.
Other big defense players suffering the brunt of the shutdown include Raytheon Company (RTN - Analyst Report) with share prices down 4.6%, United Technologies Corp. (UTX) and Northrop Grumman Corp. (NOC - Analyst Report), both witnessing a 2.9% decline since Oct 1, 2013. Also, The Boeing Company (BA - Analyst Report) indicated that it could face some disruptions with respect to delivery schedule as some of its aircraft require approval of furloughed Federal Aviation Administration inspectors before they can be delivered to customers.
The layoff by Lockheed Martin was followed by United Technologies’ announcement to lay off 2,000 employees by Monday and more than 5,000 if the shutdown continues into the next month.
As a silver lining to the current impasse, the U.S. Defense Department has announced to call back most of its civilian employees it furloughed last week under the federal government shutdown. As a result, United Technologies canceled furloughs for 2,000 employees. We believe Lockheed would also likely call back the current layoffs and not make further layoffs.
Driven by multiple strengths like growth in earnings per share and notable return on equity, Lockheed Martin presently has a short-term Zacks Rank #2 (Buy). Other stocks worth considering in the space are Northrop Grumman and Raytheon, also with a Zacks Rank #2 (Buy).