by Tony Daltorio, Investment U Research

Over the past year, stocks of companies in the defense industry have taken a beating, down thirty percent… forty percent… or more.

Valuations have taken an even harder knock, with forward price-to-earnings dropping to just under nine times 2010 earnings… their lowest levels since the early 1990s, when the end of the Cold War led to the US cutting defense spending by more than half.

Today, investors fear a repeat performance, and let's face it: The recon doesn't look good.

Reports show that while the defense budget edges towards $600 billion a year, the supplemental budgets – which fund current operations – will actually decline sharply as the US winds down operations in Iraq and wages a more limited campaign in Afghanistan.

By 2010, total spending on research and new procurement by the United States will fall $45 billion from its 2008 peak. And Marty Bollinger, the head of the defense practice at Booz & Company, believes total investment spending could drop by 40% in real terms over the next three years.

Back in the 1990s, similar conditions led to a radical shake-up of the industry, reducing capacity through a wave of mergers in response. But with so few players left in the defense sector, those companies no longer have that option in the mix.

Most defense companies recognize that if they want to survive in this new era, they have to look for new ways to generate their revenues and profits. But one company stands out as everybody else scrambles to regroup.

Lockheed Martin (NYSE: LMT), the world's biggest defense contractor, has already drawn its battle plans, and its ready for action.

Targeting Cyber Security

So far, Lockheed has situated itself perfectly to play a lucrative role in the newest facet of the defense industry as a systems integrator, countering the escalating threat of cyber crime, cyber terror and cyber warfare.

While those threats might not seem like much, they pose very real danger to everyone.