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BB&T Capital Markets Senior Analyst Jeremy Devaney weighs in on which companies are at risk due to defense-spending cuts after sequestration.
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-- automatic spending cuts dealing fact take place BBC capital markets senior analyst Jeremy today he thinks it will be negative catalysts for the government services group.
Jeremy joins us welcome to you.
Thank you thank you for having me on again before we get your investment picks are you basing your outlook for this industry group.
On the expectation that we will see these billions and billions of dollars -- defense cuts come march 1.
Sure I am in fact that we we are taking -- most conservative base case scenario possible we wanted to show our investors a very risk -- scenario.
And speaking in the full effects of sequestration into our models OK so that said.
You do see some buying opportunities.
Let we are we can't see buying up we do see buying opportunities we we like Aerovironment ticker AV -- B.
They make small unmanned aerial vehicles.
They're -- very low cost way for the military to gain intelligence surveillance reconnaissance capabilities.
In recently we've seen an upsurge in demand for those vehicles especially in new vehicle the switch blade.
As well as some of their other small vehicles.
So what exactly does that vehicle do.
There's this which clearly is a weaponized munition needs.
It's in fact launch from a two bit.
Works would be -- ground control station.
That he -- in the whom I and other of Aerovironment vehicles were quit so it offers a low cost way for.
He military to gain additional capability and weaponized capability.
Well leveraging some of the other.
Other products that Aerovironment has in its product suite we've got a buy rating on the stock 127 dollar -- I think this is.
Sorry this is a priority given the fact that.
Just put -- spending cuts as we've been talking about this -- the sequestration cuts in perspective.
He's -- meat cleaver cut this isn't like a water faucet cut we can turn on -- -- we understand a lot of the more.
Household names if you -- defense contractor is like.
Like gun Lockheed -- obviously are are on Capitol Hill you know asking lawmakers to give them clarity so they can make plans.
Many many years out the wrote ten years down the line.
I'll all the contractors have been lobbying very hard god various of the organizations the end DI AEA guy ahead.
I have been lobbying Capitol Hill in not really seeing any success there.
But when you look at names that are risking our coverage health three we have by an underweight rating its ticker -- allow.
We think there may be upwards of a billion dollars at risk in their in their revenue and if you look at where consensus currently is on the name.
They're right in the middle of management's guidance range they're they're not incorporating any sort of sequestration scenario into their models although.
Just about everybody on the streets come to the conclusion that.
This is going to happen in some way shape or form so risk is really to the downside estimated that health nut job who which company -- best organize for -- the best plan for reorganization.
Once these cuts happen.
Nobody's really come out -- discussed reorganization plans yet I think if you go back and -- listen to the fourth quarter conference calls.
General dynamics came out in -- made some comments along the lines that they were looking at some restructuring possibly.
Buy it we don't covered general dynamics today and I think.
You'd you have to go back specifically look at the look -- conference call transcript in in.
As well go for a couple of quarters because nobody's -- know exactly what segments they're going to want to shed until after this is over and that brings on the point of mergers and acquisitions of really slow down ahead of all this because nobody knows where to invest their money.
Two to gain faster moving revenue streams going for.
Understandable so for the average investor then Jeremy would you recommend holding off on the sector until after this march 1 deadline maybe even after.
The first half of these -- we get some clarity we really understand what we're working with because again you can't.
Take these cuts lately it is a significant.
Change in the business models -- companies right.
Lawyer Gloria that are right on the head -- When you look at the march 1 deadline between march 1 didn't really the the end of march in in mid April.
We think there's there's really -- near near term possibility for for a pullback in these stocks.
And those investors that are are buying right now.
Are putting them nuts and themselves that more of a significant risk then then you would be if you were holding off -- -- -- when we look Indians like Aerovironment we see a very niche play where we know specifically where the demand quotient as.
In where the customers looking to go in the future and that's the only reason we're remaining -- on them there are only -- -- in and week we feel really strongly about it going.
Or a sign of the times and if you -- believe that -- impacted you know so much everyone's daily lives are so many families are going to be impacted by Edison.
Evolved with the defense industry in some way shape or form Jeremy -- -- thank you for your take appreciate it and appreciate the time bank.
