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Federal Civilian WorkforceSince the early 1990s, the federal civilian workforce has contracted 34 percent while the federal budget outlay for human resources has expanded by 73 percent, on a constant-dollar basis, over the same time period.We believe this represents a structural shift that will keep the defense budget fromreturning to cycle lows and may serve to continue the uptrend. Furthermore, fundamental growth trends for the government services outsourcing market remain strong due to several reasons:- Reduction in the federal civilian workforce: At its lowest level since the 1960s
- Government's need to modernize legacy information systems: More complex operational, network and logistics systems
- Transformational efforts within the Department of Defense: Streamlined mobile military force
- Global war on terror: Budget environment support has been robust for GWOT; Increased spending by the Department of Homeland Security
- Increased use of private sector outsourcing: The Bush Administration prefers outsourcing solutions for political and economic reasons
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Sector Round Up – Financial TechnologyAccording to Kimsey Consulting, global expenditure on trading and related technology and services was an estimated $45.8 billion in 2007. Globally, the largest single country market is the United States, accounting for an estimated 35 percent of total global spending on trading and related technology and services. The second largest market is the UK, accounting for approximately 14 percent of spending, says Kimsey. In regional terms, Europe is the largest market, with an estimated $19 billion being spent in 2007. In comparison, Asia/Pacific spent around $7.5 billion.Expenditure on applications and associated hardware and services is calculated at an estimated $28.8 billion, almost three times the amount spent on market data information. Expenditure on telecommunications into the dealing roomwas an estimated $6 billion.The report forecasts that although growing economic uncertainty is likely to see mature markets remaining comparatively static, the ongoing development and expansion of financial, commodities and energy trading activity in emerging markets will support continued growth in financial technology investment through 2008. Read complete report.
Nutritional Value-Based Food Ratings on the RiseAccording to The Food Institute's December 2007 report, the Delhaize Group-owned Hannaford Supermarkets intends to license its Guiding Stars® nutrition navigation system to supermarket chains, vendors, healthcare groups and others in early 2008. In 2006, Hannaford introduced the program, which rates foods from zero to three stars based on their nutritional value. Of the more than 25,000 items rated, 28 percent received one, two or three stars. The program is currently in place at 164 Hannaford Supermarkets throughout the Northeast and 106 Sweetbay stores throughout Florida. Topco Associates LLC recently introduced its own food scoring system called the Overall Nutritional Quality Index, which gives an at-a-glance comparison of foods based on overall nutritional quality. The Index was developed by a panel of 12 health and nutrition experts and scores products across all food and beverage categories on a scale of one to 100. Topco aims to introduce the program to retailers, manufacturers, restaurants and online. Read complete report.
Industry OutlookThis past year was an exciting one for energy sector M&A. With oil prices nearing $100 per barrel and the issue of global warming putting the spotlight on alternative energy, M&A and funding activity in the sector increased over 2006. In 2007, 1,514 deals were announced in the global energy sector for a total value of $282.8 billion, compared with 1,356 deals and $266.4 billion in 2006. Although the total number of M&A transactions in North America increased by 3.6 percent in 2007, the charts below indicate that North America's share of total deals fell from 61 percent in 2006 to 58 percent in 2007. This was driven by strong activity in the rest of the world and by lower M&A activity in Canada, where drilling activity declined in 2007 and share prices of Canadian oilfield services trustswere generally depressed. Energy M&A activity in 2007 was particularly strong in Latin America and Europe (including Russia), where deal activity increased by 75.7 and 31.6 percent respectively. While the headlinegrabbing billion-dollar-plus deals were up 7 percent over 2006, the middle market experienced the strongest growth in 2007; deal activity in the $100 million to $500 million size increased 41 percent over 2006. Read complete report.
Strong End Markets for E&C CompaniesContinued strength in end markets, particularly in oil and gas, mining, industrial and infrastructure sectors, should drive growthfor engineering and construction companies, which are expected to benefit from new capital spending cycles in federally funded transportation, power (coal and nuclear) and nuclear remediation sectors. New power plants, retrofits and upgrades of existing plants (environmental controls) continue to provide growth opportunities. Currently there are 21 proposed nuclear power plant sites identified by the Nuclear Energy Institute in the United States Aging facilities are also providing demand for aftermarket services. Near-term opportunities are service and replacementwork for the aging fleet of nuclear power plants. Demand for engineering, procurement and construction services in the transportation sector continues to be robust. According to Granite Construction Inc., approximately one quarter of U.S. highway bridges need repair or replacement in the near term. The collapse of the I-35W Mississippi River Bridge in Minneapolis was a wake-up call for the Federal Highway Administration, which issued a strong technical advisory to all State DOTs and other bridge owners to immediately re-inspect similar bridges. On November 1, the FHWA released a total of $183.5 million to help rebuild the bridge. In late November, the FHWA awarded $1.59 million in grants to five companies developing innovative technologies to improve highway quality and safety. Read complete report.
Strategic players in the chemical industry are weathering the downturn with stronger balance sheetsIn contrast to the 2001 economic downturn, major chemical industry players have improved balance sheets with average leverage hovering below1.5 times net debt-to-EBITDA ratio. This is generally a result of lessons learned after 2001, a better-thanexpected pricing environment, and the exercise of spending discipline. The financial strength of strategic buyers will likely result in numerous transactions where they will have the upper hand, especially large transactions (above $500 million), which are extremely difficult for private equity firms to syndicate under current credit conditions. Read complete report.
Spotlight on PackagingThe packaging industry's multiple subsectors exhibit very different dynamics depending on the raw materials used in the manufacturing process. Paper-based packaging producers (primarily paperboard and containerboard) were finally able to push through price increases during the beginning of the fourth quarter, despite somewhat muted demand. Non paper-based packaging producers (plastics, glass and various metals) continue to come under pressure as prices of underlying commodities used in the production processes (principally plastic resins and metal ores and alloys such as aluminum and tin) continue to outpace overall inflation, as measured by the core PPI Index. Read complete report.
Aerospace and Defense Outlook for 2008The commercial aerospace market has strengthened considerably, with executives generally projecting very favorable conditions for growth through at least the next three years. The phrase “super cycle” has been used to describe the momentum currently flowing through the global commercial aerospace supply chain. As testament, 2007 was a record year in terms of commercial aircraft deliveries, with Boeing and Airbus delivering 440 and 455 aircraft respectively. Looking forward to 2008, there are more than 2,300 open orders for commercial aircraft with scheduled deliveries through 2010. Domestic carriers, as a combined group, have pent-up demand for more than 1,000 replacement aircraft over the next five years as the commercial fleet continues aging to an unhealthy level of nearly 25 years, on average.
The defense market is a bit less certain, as sentiment has shifted toward a more neutral stance regarding levels of future operations and funding. This is in stark contrast to the sentiment witnessed over the last several years of budget growth. The delays in funding caused by seemingly endless political impasses, combined with the upcoming presidential election, have only heightened investors' concerns about the long-term outlook for the sector. Many see the sector as being under pressure beyond 2008, with less emphasis being placed on programs correlated to supporting ongoing operations abroad. Read complete report.
