Sequestration Scenarios

Credit Suisse, which co-hosted an aerospace and defense conference last week with McAleese and Associates, came away from the event with the notion that while sequestration is "highly unlikely," it's still a "rising concern," according to a just-released research note.

"While we agree the expiring Bush Tax Cuts should drive a negotiated compromise during the lame-duck session, we see increased headline risk building into the summer," the note reads. Further:

Share Downside Outweighs Upside; Boiling Frog Still Possible:  We think defense stocks are discounting zero-to-little chance of Sequestration (which adds >$500B in incremental cuts over 9 years).   We expect ultimate negotiation to yield $100B-$300B in incremental cuts.  However, the closer the end result to the lower end, the greater the chance that further cuts become necessary in the out-years (the Boiling Frog scenario).

The note also lists the companies Credit Suisse analysts had varying degrees of bullishness if sequestration did in fact take place:

* Most Bullish: BA (OP-$85): Based on our discussions, Boeing is the only company specifically preparing for a sequestration.  While it needs new orders to keep the F-18 line open beyond 2014, we see it as best positioned in the near-term.  We note universally positive commentary on Tanker progress from all relevant DoD stakeholders.

* Slightly Bullish: LMT (N-$80): We heard resounding DoD support for F-35, but customer still frustrated by cost & schedule. Int’l demand solid, but buyers laser focused on holding price.  See building confidence in ES revs and IS&GS margins.

* Developing Risk: HII (N-$30): CVN-78 (Ford) is under pressure with overrun currently estimated at >$800M; Congress pushing to zero HII’s profit, although DoD it expected this to mitigate somewhat.

* Incremental: GD (OP-$85): Gulfstream sounds great, Marine sounds good, but Combat remains challenged.  Further, we see risk for GD’s guidance for back-ended 2012 year at IS&T with GD’s expectation for combined effect of likely FY13 CR and Sequester overhang.

Check out InsideDefense.com's coverage of the Credit Suisse conference:

Hale: Costly Submarines Will Force Cuts To Other Priorities

Venlet: Navy To Test F-35C Tailhook Mods This Summer At Pax River

PEO Aircraft Carriers Working To Cut Man Hours, Cost In Future Ships

Mabus: Navy To Move 2,000 Sailors From Desk Jobs To Piers

Venlet: JSF Deferment Will Lead To Pricing Adjustments

Hale: DOD Unmoved By Senator's Warning On More Cuts

Senior Defense Officials: DOD Plans Naval Buildup In Pacific