Presenting The Companies Most Exposed To A Slowdown In Government Spending

Following the release of the yesterday's revised CBO projections, we, together with anyone with half a brain, were stunned by the ridiculous assumption that somehow the US government can grow its revenue by 50% (!) in the span of 3 years. Since absent a wholesale increase in taxes, which won't happen ahead of the Obama presidential elections, this has a snowball's chance in happening, the only recourse to the government is to cut spending. But where? Most major governmental expenditures are non-discretionary, yet spending has to be cut... Which brings us to the topic of this post: most likely the biggest sacrificial lamb will be companies on the dole of not only the US government, but certainly foreign governments (where unlike in the US, austerity is rampaging without mercy). Courtesy of data prepared by Lehman's (now Barclays after the Blue Light special rushed purchase of Lehman NA in bankruptcy court) Matt Rothman we present the companies whose revenues are comprised at least 50% of sales to governments, both foreign and domestic.

Rothman explains:

In this note, we highlight the companies that are most at risk in a broad scope to slowdown in government spending. Specifically, we list 127 companies [TD: we present just the top 78] within the Russell 3000 that have the largest part of their revenues derived from U.S. government sources.

This data is culled from the recent annual revenues released by the companies. In these annual filings, companies are required to list all customers that account for over 10% of their annual revenues and the amount of revenues that they derive from each of these customers. We have searched for all government sources, separating out revenues from foreign governments, the U.S. federal government, state governments and local municipalities.

As shown in Figure 1, the companies are concentrated within Industrials (50 companies), Health Care (46 companies) and Technology (24 companies) sectors. As further broken down in Figure 2 to the Industry Group level, we find a preponderance of companies within Capital Goods (44 companies) and Health Care Equipment and Services (41 companies) and a tailing off into Software (12 companies) and Technology Hardware (11 companies).

Obviously, the degree of risk for each individual company is a complex matter that must be studied carefully on a case-by-case basis and our work here is best used as a starting point for that analysis. Nonetheless, we do believe the companies shown in Figure 3 do represent names where revenues may be at risk should a material cut in government spending materialize.

We won't recreate the entire list: we focus only on the 78 top companies whose revenue from governments is at least 50% of total. We are confident this should provide a large enough basket to express a bearish outlook on government largesse (or, inversely, bullish on fiscal prudence and/or austerity).


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