Deja Vu All Over Again (Updated)

Defense Secretary Leon Panetta's plan to unveil details of his department's fiscal year 2013 budget request tomorrow is nothing new, according to Wall Street analysis firm Credit Suisse.

In a research note released this morning, Credit Suisse analysts state: "Panetta is expected to borrow a page from his predecessor's book & offer advance details about the FY13-17 budget, a month before its scheduled unveiling in early February. This announcement mirrors a similar move last year from then-Sec. Gates, who rallied defense markets with the early info."

More:

*      Why Now? Like 2011, we expect the DefSec to highlight strategic objectives for DOD, including major program curtailments and cuts (this time dictated by the recent Roles & Means review, which is an adjunct exercise to the 2010 Quadrennial Defense Review that was precipitated by August’s Budget Control Act). But, unlike last year, this announcement is largely expected, precisely because these cuts have been well-telegraphed by the BCA.

*      Last Yr. Stocks Rallied on the News: Sec. Gates catalyzed a defense rally in early Jan when his detailed budget preview removed uncertainty until the release on 2/14/11. In this period, defense outperformed the S&P by ~7.5%.

*      This Year Is Different; We Expect the Current Rally to Fizzle: Last year's January defense rally followed two months of relative underperformance by a total of 8% as the market fretted about program uncertainty. This year, the rally appears to have started earlier, with the same defense names up 4.5% during November and December. Thus, we think bullish investors have already been paid on this theme and see the rally dissipating in coming days.

*      Share Downside Possible: Unlike last yr, which addressed GFY12's budget, these cuts are expected to address the full 5-yr planning period (GFY13-17), and account for just more than half ($260B) of the $450B in prescribed 10-year cuts from the BCA. Thus, the magnitude and permanence of decisions may appear more significant. Further, this FY13-17 plan will not embed the potential sequester, which could more than double the known cuts, and increase downside for investors.

*      Procurement Most Exposed, Particularly Army: While we believe continued reductions in force structure (personnel) will account for some of the spending reduction, these are likely back-end weighted during the 5-yr period, especially with ongoing war activity. This leaves Readiness (O&M) and Procurement as the nearest targets, and we expect DoD to focus on the latter, with greatest exposure to ground vehicle and other Army weapons, potentially impacting GD, BAE.LON, OSK, NAV, HRS and XLS.

*      See Further F-35 Restructuring: While USAF & Navy should fare better, we do see further reductions to five-year F-35 procurement plan, perhaps by as much as 20%, which could impact LMT & NOC.

(UPDATE 2:50 p.m.: DOD officials tell InsideDefense.com that budget details won't be revealed until nect month.)