Bigger sequestration cuts coming in 2014

Sequestration hasn't had much of an impact on the federal market, but that's about to change.

Cuts in fiscal 2014 will be $52 billion, compared to $37 billion in fiscal 2013, and most of the 2013 cuts were internal, said Bill Loomis, managing director of Stifel, Nicholas & Co. He was speaking Wednesday at the 13th Annual Defense, Aerospace and Government Services M&A conference produced by the accounting firm McGladrey LLP and the law firm Pillsbury Winthrop Shaw Pittman LLP..

The government has shaved things like travel, conferences, readiness, and operations and maintenance, and has also made cuts through furlough, he said.

Spending cuts are also being made through the drawdown in Afghanistan, which will affect contractors not just in Afghanistan, but also in the United States, Loomis said. Companies that provide the Army with support services, like C4ISR, will be affected, for example.

On this issue, there wasn't a lot of change in the second quarter of calendar 2013, and "frankly, I don't think there will be a lot of change in the third quarter," Loomis said. The third quarter ended Sept. 30.

Loomis offered some good news, saying that over the next two to five years, federal IT stocks will outperform similar to how they did in the 1990s for a number of reasons:

• Government continues to focus on cutting costs.
• Current technology cycle plays into the government's goals, with things like lower-cost tech, incremental development, big data analytics, mobile applications, and expanding the reach to citizens. 
• Cybersecurity demands are only increasing.
• Fewer troops will make for an increased reliance on ISR and other IT solutions

As for what businesses should be doing, Loomis suggested that they take risks, reposition themselves sooner rather than later, and think outside of the box.

Companies should be innovative when thinking about how their IT can serve their customers. Also, since valuations are declining, now is the time for quality acquisitions, he said.