The Boeing Co. (BA) received a sizeable order from the Pentagon on Dec 12, following a big order of $6.5 billion from Air Canada for its commercial unit. These contracts imply that the aerospace behemoth is prudent enough to not only maintain its foothold in the commercial space, but also remain proactive in the defense arena despite budget austerities.
The company has been able to lock contact worth up to $872.8 million from the Pentagon’s Dec 12, 2013 defense funding list. The order is for a number of system upgrades for its F/A-18 A/B, C/D, E/F fighter planes, and the EA-18G electronic attack planes for the U.S. Navy and allied governments of Australia, Finland, Switzerland, Kuwait, Malaysia, and Canada. This is an indefinite-delivery/indefinite-quantity contract, with work slated for completion in Dec 2018.
Boeing is the largest aircraft manufacturer in the world in terms of revenue, orders and deliveries, and one of the largest aerospace and defense contractors besides other defense giants like Lockheed Martin Corp. (LMT), Raytheon Co. (RTN) and Northrop Grumman Corp. (NOC). In fact, Boeing’s defense business accounts for approximately half of its top line.
Meanwhile, Boeing’s third quarter deliveries in the defense and space business numbered 43 in the third quarter of 2013 compared with 50 in the third quarter of 2012 and 31 in the second quarter of 2013. Also, quarterly operating margin plunged 210 bps year over year to 8.4%. Hence, headwinds in the global airline industry and cutbacks in the U.S. defense budget have certainly hit the company’s defense segment.
We note that the U.S. Department of Defense (DoD) still continues to award contracts to defense players – both big and small, publicly traded or private. Boeing has mainly been securing low-priced contracts besides the occasional high-value orders attributable to the ongoing sequestration in the U.S., the recent being a $325 million contract. This order entails offering of "diverse and highly complex" systems engineering and integration services related to the country’s ballistic missile defense system.
Boeing’s diverse defense product offering has grabbed significant attention from the Middle East, India and Australia. We believe Foreign Military Sales contracts would to a large extent offset budget austerities in the U.S.
Currently, Boeing carries a Zacks Rank #2 (Buy).
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