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How Woodward Would Fit into Boeing’s Global Services Division

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Boeing’s Global Services division

In July 2017, Boeing (BA) created its new Global Services unit out of its existing verticals. The company established the division by integrating the services capabilities of its space, government, and commercial sectors into a single business. In 4Q17, this segment reported revenues of $4.0 billion, representing a 17.0% rise over 4Q16 revenues of ~$3.4 billion.

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Will the deal go through?

Boeing is scouting potential targets to put its newly formed Global Services division on an entirely different platform. BA’s CEO, Dennis Muilenburg, aims to more than triple the new division’s revenue to $50.0 billion over the next ten years. Boeing has been taking over work earlier done by its aircraft parts suppliers, which is a part of its strategy to construct a portfolio of high margin spare parts businesses that caters to airlines around the world.

Woodward (WWD) had revenue of $2.1 billion and operating profit of $263.9 million in the last 12 months, which translates to an operating margin of 12.2% in the same period. The company derives 35% of its revenue from energy companies. Woodward’s aerospace unit also has a partnership with General Electric (GE) on the jet-engine front, which could possibly hinder a full-fledged acquisition of WWD’s entire portfolio.

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The analyst community is instead mulling a possible joint venture of Boeing with Woodward rather than a complete takeover. In January 2018, Boeing formed a joint venture with Adient, a leading seat supplier to the automotive sector. With this venture, the former plunged into the aircraft seat production business.

ETF investment

The US tax reforms have benefitted Boeing a lot. The company’s expected lower effective tax rate is set to boost its cash flows in the coming quarter. Boeing is the top portfolio holding of the Industrial Select Sector SPDR Fund (XLI), which has a 7.9% weight in the company and 17.4% in the aerospace and defense industry overall. Other than Boeing, the top holdings of XLI are 3M Company (MMM) with a 5.5% weight, Honeywell International (HON) with a 4.7% weight, and Union Pacific (UNP) with a 4.2% weight.

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