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Which IT Firm Serving Defense Is Riding Tailwinds for Aerospace Electronics?


Resurgent commercial demand combined with a politically resilient defense budget will propel this undervalued stock to the front ranks of the aerospace sector.

Between now and the end of 2012, Democrats and Republicans must put aside their rancorous differences and somehow forge a compromise to avoid the dreaded "fiscal cliff," the term for drastic spending cuts and tax increases passed last year by Congress to prevent a first-ever US government default.

If January arrives without a federal budget agreement, investors can anticipate a broad selloff of stocks. The typically sacred DoD would be a major casualty of the fiscal cliff, with a projected $55 billion in reductions from current levels of discretionary defense spending in 2013. That represents a minimum 10% cut to nearly every defense program and activity.

Military hawks are loudly protesting these potential military cuts and key committee chairmen on Capitol Hill are working overtime to rescue defense from the chopping block.

The smart bet, though, is that the military won't hold a bake sale anytime soon. Students of politics know that the Pentagon almost always gets its way.

Despite the increasingly nasty partisan rhetoric, there's a strong likelihood that reason will prevail and a political deal will be hammered out before the tax and fiscal package is automatically triggered on January 1, 2013.

Military spending is likely to grow, regardless of which party occupies the White House or controls Congress. Robust Pentagon outlays in turn boost high-margin military electronics, which is Harris' forte.

The secular trend for greater military aerospace spending is global. According to the Teal Group, aerospace consultants based in Fairfax, Virginia, the world's air forces are at various combat aircraft replacement and upgrade cycles, which is good news for the avionics and electronics market. Despite calls for austerity in troubled euro zone countries, the aerospace market remains a global arms bazaar.

With their coffers full of "petro-dollars" and tensions in the region rising, Middle Eastern sheikdoms have been in a mood to buy fighter jets and communications systems. At the same time, most NATO countries are in an active replacement phase for their 1970s designed aircraft, while emerging nations such as India will evaluate entirely new aircraft sources in the near future.

More than 5,000 combat aircraft will enter service globally over the next decade, with a peak of 524 deliveries in 2014. These aircraft require sophisticated electronics and communications systems-Harris' area of expertise and a market whereby it enjoys loyal, repeat clients.
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