NEW YORK The wars in Iraq and Afghanistan are winding down, Osama bin Laden is dead, and the federal government is deeply in debt. This spells the end of what was a golden decade for the defense industry.
In the decade since the Sept. 11 attacks, the annual defense budget has more than doubled to $700 billion and annual defense industry profits have nearly quadrupled, approaching $25 billion last year.
Now defense spending is poised to retreat, and so are industry profits. Were about to go into the downhill side of the roller coaster here, said David Berteau, a defense industry analyst at the Center for Strategic and International Studies.
Congress agreed last month to cut military spending by $350 billion over the next 10 years. The defense budget will automatically be cut by another $500 billion over that period if lawmakers fail to reach a deficit-cutting deal by November.
Defense industry stocks have already begun to suffer; they are lagging the S&P 500 in recent months. During the last defense spending downturn, which lasted from 1985 to 1997, defense stocks underperformed the broader market by 33 percent, according to an analysis by RBC Capital Markets.
The Sept. 11 attacks forced the worlds biggest and best-funded military to quickly retool itself. It needed to develop technologies, weapons and strategies to find and fight a network of terrorists.Floodgates opened
The U.S. spent $1.3 trillion in the 10 years after the attacks chasing al-Qaida and fighting two wars. That was on top of baseline military spending in excess of $4 trillion. After 9/11 the floodgates opened, said Eric Hugel, a defense industry analyst at Stephens Inc.
All that spending was reflected in the soaring performance of the defense industry, led by the top five defense contractors: Lockheed Martin, Boeing, Northrop Grumman, General Dynamics and Raytheon.