Government Procurement Driving Niche Products and Earnings

There are things that only the government buys, and this is especially true of the military. There is not much civil market for intercontinental ballistic missiles with nuclear warheads. There are also many things that government purchases that do come straight from the commercial market -- such as office supplies, computers and basic software. Over the last twenty years there has been a push to buy more straight commercial or non-developmental items to reduce cost and development times. Even so there are niche products that allow companies, large and small, the opportunity to make a great deal of revenue mainly selling only to the government.

FLIR Systems makes electro-optical sensor systems primarily for military applications. They just reported their first quarter results and continued the solid growth they have seen over the last several years. Compared to last year revenue was up fifteen percent and earnings almost fifty. This growth was primarily due to the military side of their business as the recent downturn in the world's economy has affected the civil part. FLIR makes sensor packages that go on aircraft to facilitate night operations, targeting and data collection. They also have done well selling ground based security systems for U.S. bases that provide surveillance at night. Some police and other U.S. government security agencies have also invested in these systems for their aircraft.

Ultralife is another good example. They unfortunately reported a decline in revenue and earnings for this past quarter. The company makes batteries and power control units for military and civil applications. They had seen growth over the last several years as the U.S. military especially invested in new radios and communication systems. Batteries are critical to the modern military as so much of their communication, sensor, and advanced weapons systems require power to be effective. This has allowed Ultralife to build up a business. The reason they cite for their problems over the last quarter is illuminating -- their have been delays in the awards of U.S. military contracts.

There is one issue though with focusing on the military or government side of the business rather then diversifying. If there is a major change in spending priorities by the customer you may see what had a been a steady stream of business dry up. The nature of U.S. defense spending especially has been boom-and-bust. The Eighties were a boom, the Clinton years saw significant declines and since 9/11 there has been robust growth. The current FY10 budget sees a little growth in defense spending, but as the pressures on the Federal budget grow the Obama administration may not be able to keep up the rate of spending.