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GENERAL DYNAMICS (GD)
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Pentagon's empty posts cause uncertainty for defense contractors

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08/11/2017 | 11:54pm CET
FILE PHOTO: Sunrise over the Capitol on the second day of the government shutdown in Washington

U.S. President Donald Trump's failure to fill dozens of senior-level positions at the Pentagon is making it difficult for defense contractors to forecast business.

Defense company officials, speaking on conference calls after their just-reported quarterly earnings, did not blame Trump directly, but said the lack of appointments to key positions at the Pentagon had slowed contract awards and created uncertainty.

"The still-high number of unfilled leadership appointments and the approaching government physical year-end continue to serve as headwinds," said Roger Krone, chief executive of Leidos Holdings Inc (>> Leidos Holdings Inc), on an Aug. 3 call with analysts.

Krone, whose company is one of the largest providers of services to U.S. armed forces, said those open posts have slowed the awarding of government contracts.

The Department of Defense said it has 42 unfilled top-level posts that require Senate confirmation, including general counsel, inspector general and other important roles like secretary of the Army and undersecretary of the Navy.

The Pentagon referred a request for comment on its unfilled posts to the White House. A White House official said: "Democrat obstruction has played a key role in jamming up the president's agenda."

Of the 42 open positions that require Senate confirmation, 29 have no nominee identified, while 13 have nominees awaiting confirmation.

TALKING POINT

For two of the largest U.S. defense companies, General Dynamics Corp (>> General Dynamics) and L3 Technologies Inc (>> L3 Technologies Inc), thin staffing at their largest customer was a talking point with investors.

The Defense Department is "working on filling several positions in the Pentagon and that has definitely resulted in a slowdown," said Ralph D'Ambrosio, chief financial officer of L3, a prime contractor for surveillance, security and detection systems.

Because of the slowdown, the quarter just ended was the lowest second-quarter spending level on record at $62.5 billion, according to a report by data analysis firm Govini, seen by Reuters. The report said "federal procurement resources are stretched thinner than they ever have been."

Leidos' Krone pointed to the expected one-year delay of the Navy's $3.5 billion NMCI NextGen program to update the intranet used by the U.S. Navy and Marine Corps as an example of a big contract delay.

Defense spending for the 2018 fiscal year and beyond was unclear, said Byron Callan, a defense analyst at Capital Alpha Partners, noting that few companies have changed their long-term profit expectations, suggesting that uncertainty has made forecasting more difficult.

"The fact that we didn't have an enacted (fiscal year) 2017 budget until the early part of May, which was seven months into the fiscal year, has definitely slowed down the contracting activity and the obligation activity within the Department of Defense," said D'Ambrosio.

Some of the positions have been difficult to fill. Two of Trump's nominees for Army secretary, its top professional civilian position, withdrew their names from consideration. The White House then nominated Raytheon Co (>> Raytheon) lobbyist Mark Esper, and he is awaiting a vote on his confirmation.

General Dynamics CEO Phebe Novakovic said during her company's conference call that "without these appointments, it is difficult to process contracts" and to make progress on defense-related projects.

Novakovic's information systems and technology business unit has thousands of shorter sales-cycle service contracts which can reflect delays quickly.

(Reporting by Mike Stone; Editing by Chris Sanders and Bill Rigby)

By Mike Stone

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Financials ($)
Sales 2017 31 107 M
EBIT 2017 4 198 M
Net income 2017 2 993 M
Debt 2017 1 506 M
Yield 2017 1,66%
P/E ratio 2017 20,24
P/E ratio 2018 18,74
EV / Sales 2017 1,96x
EV / Sales 2018 1,84x
Capitalization 59 370 M
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Technical analysis trends GENERAL DYNAMICS
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Mean consensus OUTPERFORM
Number of Analysts 20
Average target price 227 $
Spread / Average Target 14%
EPS Revisions
Managers
NameTitle
Phebe N. Novakovic Chairman & Chief Executive Officer
Jason W. Aiken Chief Financial Officer & Senior Vice President
S. Daniel Johnson EVP-Information Systems & Technology
John M. Keane Independent Director
Les L. Lyles Independent Director
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