Bearish On Defense

At least one Wall Street analysis firm isn't too bullish on the defense sector next year.

In a "2013 Aerospace & Defense Outlook" released today, Credit Suisse analysts note that during 2012, "defense has outperformed aerospace (19.3 percent vs 2.1 percent), driven by high cash returns to shareholders at defense primes, a beat and raise trend, and the view by many that defense offered a relative safe-haven against wider economic uncertainty."

As for next year, however:

In 2013, we think defense will eventually succumb to more tangible pressure on topline by 2014, even without Sequester. As such, we favor aerospace, as do investors, according to our latest buyside survey. We specifically prefer [original equipment] suppliers [Precision Castparts], [Triumph Group Inc.] and [BE Aerospace] over [Boeing] as the latter could lag if orders slow, along with Q1 strike risk. Inside we review expectations for each end market, and draw on results from our new 2013 Investor Sentiment Survey.

And:

Defense -- Market Yet to Recognize CY14 Downside: Many defense names are at-or-near 52-week highs having waved off budget worries on the view that major cuts are too extreme to proceed, or that strong defense yields trump poor economic visibility elsewhere. We think this view could hold into H1’13 until the fiscal cliff issue is resolved. Thereafter, we expect the market to refocus on the greater relative downside to CY14 topline and so we look for a correction in defense in H2’13. We favor RTN for its higher electronics & int'l exposure, solid execution & bookings trends, stable mgmt. and well balance cash return strategy.

To view the full Credit Suisse analysis, click here.