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Sector Snap: Defense contractors

January 2, 2013

NEW YORK (AP) — Regardless of Congressional budget cuts, Standard & Poor’s expects cash flows will remain strong for defense contractors.

The ratings agency said Wednesday that Congress has delayed big budget cuts that were part of the so-called fiscal cliff by two months. If the delay did not occur, S&P said that there would have been more than $500 billion in additional cuts to the U.S. defense budget over the next 10 years. Of that amount, $55 billion would have taken place in fiscal 2013.

The ratings agency said that it does not believe Congress will implement the entire amount of the budget cuts, but that an additional $100 billion to $200 billion may be part of a final agreement.

Standard & Poor’s Ratings Services doesn’t anticipate taking rating actions for the industry even if the cuts are fully implemented. The agency said that large defense contractors, which typically have diverse weapons programs, should continue to generate good cash flow. What could be a larger risk to their credit quality is if the contractors respond to poor earnings growth by boosting stock buybacks, dividends or debt-finance acquisitions, S&P explained.

The agency said it could possibly cut ratings for smaller defense contractors, which are usually less diversified and have fewer financial resources, if the defense budget cuts materially deteriorate their credit quality. However, S&P said it would probably need more details on what programs would be cut before taking any possible rating action.

Here is how some defense contractors are faring in afternoon trading.

Lockheed Martin Corp. gained 68 cents to $92.97.

Northrop Grumman Corp. rose 51 cents to $68.09.

Raytheon Co. climbed 74 cents to $58.30.

In London, BAE Systems added $12.22, or 3.6 percent, to close at $349.12.

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